Hologic, Inc.

Good afternoon, and welcome to Hologic's third quarter fiscal 2022 earnings conference call. My name is Cody, and I am your operator for today's call. Today's conference is being recorded. All lines have been placed on mute, and I would now like to introduce Ryan Simon, Vice President of Investor Relations. Please go ahead.

Thank you, Cody. Good afternoon, and thank you for joining Hologic's third quarter fiscal 2022 earnings call. With me today are Steve McMillan, the company's chairman, and President and Chief Executive Officer, and Carlene Oberton, our Chief Financial Officer. Our third quarter press release is available now on the Investors section of our website, along with an updated corporate presentation. We will also post our prepared remarks to our website shortly after we deliver them. And a replay of this call will be available through August 26th. Before we begin, we would like to inform you that certain statements we make today will be forward-looking. These statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied. Such factors include those referenced in the Safe Harbor Statement included in our earnings release and SEC filings. Also during this call, we will discuss certain non-GAAP financial measures. a reconciliation to GAAP can be found in our earnings relief. Two of these non-GAAP measures are one, organic revenue, which we define as constant currency revenue, excluding the divested blood screening business, and revenue from acquired businesses owned by Hologic for less than one year. And two, organic revenue, excluding COVID-19, which excludes COVID-19 assay revenue, revenue related to COVID-19, and discontinued product sales and diagnostics. Finally, any percentage changes we discuss will be on a year-over-year basis, and revenue growth rates will be in constant currency unless otherwise noted. Now, I'd like to turn the call over to Steve McMillan, Hologic's CEO.

Thank you, Ryan, and good afternoon, everyone. We are pleased to discuss our financial results for the third quarter of fiscal 2022. Our results continue to showcase the strength, durability, and diversity of our business. Total revenue was just over $1 billion, and non-GAAP earnings per share was 95 cents. Both numbers exceeded the midpoint of our guidance on the top and bottom lines. The result of both enduring COVID revenue and also strong performances in our core diagnostics and surgical businesses. In this dynamic and ever-changing world, we continue to live our purpose, passion, and promise to enable healthier lives everywhere, every day, and be global champions for women's health. In doing so, our industry-leading products continue to reach even more patients around the world, while our business delivers strong financial performance and value for our shareholders. To put it simply, the durability and diversity of our business enables Hologic to succeed in this challenging macro environment. As we navigate a multitude of headwinds, our confidence in our business remains steady and remains high. Looking longer term, our message is also unchanged. We are confident, despite the current turbulence, that our previously announced 5% to 7% annual organic revenue growth rate through 2025 remains an achievable target, provided the current chip headwind normalizes as we expect. Ahead of turning the call over to Carlene to discuss our financial results in more detail, we'd like to highlight growth drivers and provide updates on each of our businesses, diagnostics, breast health, and surgicals. And to close, we are excited to share our experience from the World Economic Forum annual meeting in May, an experience that reaffirms the importance of our place and our voice on the world stage advocating for women's health, especially now. Before jumping into each division, it is important to revisit the impact of COVID on our business. The reality is, that whether the demand for COVID testing is high or low, we are poised to succeed either way. We have a natural COVID hedge. As we have seen over the past two years, COVID prevalence affects each of our base businesses. As COVID cases rise, elective well-woman exams, screenings, and surgical procedures are often postponed. Conversely, as COVID declines, our base business strengthens. As we responded with unprecedented speed to answer the world's needs for highly reliable molecular COVID testing, we also dramatically strengthened our company for the future. We also know that many of you are trying to gauge the longer-term impact and durability of our additional Panther placements, as well as the impact of our various acquisitions over the last couple of years in diagnostics and surgical. The truth is, the various surges in COVID cases around the world through many of the last quarters have often created wide variability in the comps, as some quarters reflect times of significant non-COVID-related hospital and doctor visit slowdowns, while others bounce back stronger in various varying geographies in any given quarter. When we last reported in April, for example, our core diagnostic and surgical businesses posted year-over-year growth rates of 4% and 3.5% respectively amidst the COVID surge at the time. So for anyone questioning these admittedly lower growth rates, we want to highlight two numbers from this quarter. The first number, 22.4%. That was the growth in our global molecular diagnostics business. And the second number, 9.7%. That was the growth in our surgical business this quarter. Now, we'd encourage two simple takeaways from these results. One, these businesses have strong underlying growth. And two, the true growth rate is somewhere in between last quarter's results and this quarter's. underscoring the need to view how our strength evolves over time, and given the variability of COVID, that no single quarter result is going to match a linear model. Now, shifting gears to the businesses. First, in diagnostics, with COVID testing significantly down sequentially, our third quarter provided an opportunity for customers to validate and run more non-COVID assays on their Panther systems. As a result, our diagnostics business grew 15% excluding COVID year over year worldwide, a truly phenomenal result, and one that demonstrates the impact of women returning to their wellness exams and procedures. Even more impressive, as mentioned earlier, our global molecular diagnostics business grew over 22% excluding COVID in the period. An early yet clear sign that our expanded Panther installed base is A, being utilized, and B, will prevail as an instrument of choice as customers consolidate their molecular testing menu to high throughput, high automation platforms. For more color on the growth drivers within molecular diagnostics, Performance was driven by a combination of both legacy and new assays, namely the BVCV-TV vaginitis panel, Mgen, CTNG, and our respiratory menu on the Panther Fusion, to name a few. Our vaginitis panel continues to outperform and deliver impressive growth on both a sequential and year-over-year basis. As we have previously stated, the vaginitis panel is well positioned to become a top three assay in our molecular diagnostic portfolio over time. International diagnostics was also a bright spot in the quarter. The business grew 16.5%, excluding COVID, driven primarily by our virology portfolio. As expected, Panther placement slowed to 59 new systems placed in the quarter, with nearly 70% of these placed internationally. While a decline from the 119 and 123 systems placed in our first two quarters, annualizing Q3's placement lands within our historic runway rate of about 225 to 250 placements per year. As a reminder, Panther sales have minimal impact to the molecular diagnostics growth rate, as assays are the primary driver of growth by far. Further, placements at lower levels going forward is consistent with our expectations, given we have increased our panther footprint by nearly 85% since the start of the pandemic. We now have roughly 3,200 panthers installed worldwide. To close out the diagnostics update, our biotheranostics business was again a highlight for the quarter. posting $18.9 million in sales, representing outstanding growth of 43%. Moving on to breast health. First and foremost, as to chip supply, we reiterate our statement from last quarter. We believe the third and fourth quarters of our fiscal 2022 will prove to be the low watermark in terms of chip availability for our gantries. Working closely with our suppliers, we observed positive trends in Q3. These positive trends include stabilizing lead times, procurement through a combination of channels, and most importantly, narrowing the breadth and depth of tight supply. Although we remain optimistic these positive trends will maintain throughout the remainder of our fiscal year, this situation remains fluid. As for gantries, demand remains strong. Our best-in-class technology, service, and customer satisfaction continues to differentiate and separate us from the competition. In addition, our sales force continues to place orders in line with quotas set prior to the chip headwind surfacing, and there has been no meaningful change to the rate of canceled orders. On the chip supply chain recovery, While we are not providing fiscal 2023 guidance on this call, we do anticipate that chip supply and thus gantry availability will be recovering throughout fiscal 2023 and continue into 2024. Next, in surgical, the business returned a strong performance, posting 9.7% revenue growth in the third quarter. This growth was driven primarily by the combination of MyoSure, our Fluent fluid management system, and Boulder. As a reminder, our MyoSure devices are used for fibroid and tissue removal, and the Fluent system is complementary to MyoSure, assisting physicians with hysteroscopic procedures. The Fluent system simplifies and streamlines the historically complicated and cumbersome fluid management workflow used in these procedures. While MyoSure and Fluent sales represent the lion's share of surgical growth in the quarter, we are also very excited by the growth from our laparoscopic portfolio. Both the Assessa procedure and Boulder devices that we acquired to add growth and diversify the franchise performed well. Specifically, we are excited by the incremental progress in sales of the Assessa procedure, Smaller numbers, but revenue growth of nearly 50% year over year. A meaningful step in increasing the utilization of this novel procedure. Assess's growth was driven primarily by two factors. First, excellent efforts from our team to increase patient-covered lives to 84% compared to 26% when we first acquired the business about two years ago. With this critical mass of covered lives, which is often considered table stakes by many physicians, more doors were opened. Second, growth was also driven by more physician access to conduct monitored cases. Access was both in person and also via our innovative virtual case monitoring platform. This virtual system was implemented specifically to address physician access challenges created by COVID. As the COVID pandemic moves gradually to an endemic state and physician access improves, we are confident that ASESA will be a meaningful growth contributor going forward. And finally, as many of you know, in May, we had the opportunity to participate at the World Economic Forum annual meeting held in Davos, Switzerland. At the forum, we met with world leaders and changemakers to further our mission and champion women's health Our message was clear. Putting women's health at the forefront was long overdue. The time to elevate women's health with the help of science-backed data to guide decisions and policymaking is now. As we have said before, women's health is the cornerstone of families, communities, societies, and economies around the world. With insights from our Hologic Global Women's Health Index, Project Health Equality, and decades of leadership in women's health, we came to the forum to make a difference. We left the forum knowing we had. We understand change does not move in a straight line, and we are committed to supporting women every step of the way. Before we turn the call over to Carlene to conclude, We want to repeat that our third quarter results give us even more confidence in the strength of our business. This confidence is rooted in our demonstrated ability to absorb and adapt to the pressures and headwinds of this dynamic macro environment. As the current pressures and headwinds subside over time, we are in strong position to continue our durable growth trajectory for quarters and years to come. With that, let me turn the call over to Carlene.

Thank you, Steve, and good afternoon, everyone. We are very pleased to share third quarter results that once again significantly exceeded our guidance for both revenue and non-GAAP EPS. Our third quarter financial performance highlights the strength of our core diagnostics and surgical businesses, both of which surpassed our long-term revenue target of 5% to 7% growth in the period. In our breast health business, although we continue to see headwinds related to semiconductor chip availability, as Steve mentioned, we remain optimistic that the supply environment will start to improve in our fiscal 2023. In terms of COVID-19 testing, we continue to showcase our agility in responding to highly variable global demand. And while we continue to meet our customers' COVID testing needs, We also have delivered on robust demand for our non-COVID molecular diagnostics menu. Finally, cash flow generation in the third quarter was very strong, again coming in above pre-pandemic levels. As a result, our balance sheet remains an exceptional pillar of strength. Moving on, we will now provide more color on our financial results. In the third quarter, both top line performance and bottom line profitability were well ahead of previous estimates. Total revenue came in just above $1 billion, more than $100 million higher than the midpoint of our guidance. And non-GAAP EPS was $0.95, $0.25 higher than the midpoint of our prior guide. Turning to our business results, In diagnostics, global revenue of $560.1 million declined 13.6% compared to the prior year. However, excluding COVID assay revenue, related ancillaries, and a small amount of revenue from discontinued products, worldwide organic diagnostics revenue increased 15%, a great result against a solid comp in the prior year. As a reminder, Our organic results for fiscal Q3 2022 include biotheranostics and diagenode revenue, as these transactions have now annualized. Within diagnostics, our molecular business was exceptionally strong in the fiscal third quarter. Excluding the impact of COVID-19, molecular revenue grew over 22% organically in the period. underlining this excellent result with strong utilization across our base molecular menu. As Steve highlighted, growth from our vaginitis panel led the way, while our virology portfolio also delivered strong performance. In addition, we saw stability in our core STI menu in the period, affirming our leadership position in women's health diagnostics. While these diagnostic results include a small amount of residual demand from the adverse impact of COVID felt in the second quarter, our molecular franchise continues to be a key catalyst of our future growth. We are very encouraged to see customers transition additional menus onto our Panther systems as COVID testing demand declines. As it relates to our COVID results, we generated 173 million of COVID assay revenue in the quarter. exceeding our guidance of 100 million. We shipped about 8.1 million tests to customers, reflecting a global ASP of approximately $21. Although ASP held steady this quarter, we still believe that pricing will eventually fall as reimbursements declines. In terms of COVID assay revenues split by geography, domestic demand was strong while international demand declined throughout the quarter. The U.S. COVID assay revenue represented approximately 60% of total COVID testing revenue in the period, a flip in geographic COVID demand versus the prior year, underscoring the variability of COVID revenue. Rounding out diagnostics, our cytology and perinatal businesses increased 3.5% compared to the prior year. This result is reflective of patients returning to their well women's exams after postponing these important visits during periods of high COVID prevalence. In breast health, global revenue of $282.8 million was down approximately 18% as expected, primarily driven by the chip supply shortages we have discussed over the past six months. Related to gantries, we performed slightly better than anticipated. While our acquisition of chips in the quarter met our expectations, We again delivered slight favorability through reclaiming, refurbishing, and recertifying printed circuit boards from servicing our gantry install base. Moving to interventional breasts, the segment grew over 4% in our fiscal third quarter. This performance was driven by growth in Bervera's disposable needles. Customers continue to see the benefit of Bervera's differentiated efficient biopsy workflow. especially as their labor resources have become increasingly constrained. In surgical, third quarter revenue of $138.1 million grew almost 10%. We are very pleased with the strong rebound in the business during the period, as positive procedural trends exiting our second fiscal quarter continued through June. Powering this quarter's performance for surgical was a nice lift from MyoShore in the related fluent fluid management system Lastly, in our skeletal business, as expected, revenue of $21.7 million decreased approximately 14% compared to the prior year period. Now let's move on to the rest of the non-GAAP P&L for the third quarter. Gross margin of 63.3% was ahead of our forecast, driven by the higher-than-expected COVID-19 testing volume and strong results in our base businesses in the period. Total operating expenses of $311.2 million in the third quarter increased less than 1% compared to the prior year. The increase in operating expenses was driven by spend within marketing and R&D, partially offset by less G&A and sales expense. However, when we normalized our spending from Moby Diag in Boulder, operating expenses decreased 3% compared to the prior year. Finally, our tax rate in Q3 was 21%, as expected. Putting these pieces together, operating margin for Q3 came in at 32.3%, and net margin was 24.1%, both above pre-pandemic levels. Non-GAAP net income finished at $241.5 million, and non-GAAP EPS was 95 cents. Moving on from the P&L, cash flow from operations was $330.6 million in the third quarter. These robust cash flows continue to provide tremendous financial and strategic flexibility. Based on this strong operational performance, we had $2.4 billion of cash on our balance sheet and our leverage ratio was 0.2 times. As we have previously stated, we are comfortable building our cash balance during this challenging macro backdrop. That said, we continue to diligently pursue M&A opportunities in each one of our businesses. Finally, while there were no cash repurchases during the quarter, our share repurchase program remains an ongoing part of our capital deployment framework. So far this fiscal year, we have repurchased approximately 5.2 million shares for $367 million, a sizable outlay of funds. Now let's move on to our updated non-GAAP financial guidance for the fourth quarter and full year fiscal 2022. As a reminder, our organic guidance excludes acquisition revenue until each deal annualizes. Therefore, our fourth quarter guidance only excludes Boulder revenue from our organic base. Given our strong third quarter performance, we are once again increasing our full year revenue and EPS guidance. For the full year, we now see total revenue in the range of 4.75 to 4.78 billion, an EPS of $5.79 to $5.84, representing an increase of $115 million on the top line and 26 cents on the bottom line compared to the midpoint of our previous guidance. With only one quarter remaining in our fiscal year, this annual guidance implies revenue of $840 million to $870 million in EPS of 60 to 65 cents for our fiscal fourth quarter. With respect to foreign exchange, given the unabated strength of the U.S. dollar, we are assuming an FX headwind of slightly more than $20 million in our fourth quarter of 2022, nearly $10 million higher than our prior guidance incorporated for the quarter. In terms of COVID sales, we expect COVID assay sales to be at least $70 million in the fourth quarter of 2022, and $1.35 billion for the full year. COVID-related items, inclusive of a small amount of discontinued product revenue, are expected to be slightly less than $35 million in the fourth quarter and $215 million for the full year. As it relates to the breast health chip shortage, although we had marginal improvement versus expectations in Q3, guidance on the gantry revenue shortfall for the fourth quarter remains unchanged from our prior messaging. Moving down the P&L, for the full year, we forecast our non-GAAP gross margin percentage to be in the high 60s, and our non-GAAP operating margin percentage in the high 30s to approximately 40%. Both estimates are well above pre-pandemic levels. Further, our Q4 guidance incorporates the margin impact from our breast health supply chain revenue shortfall. As a reminder, GANCHI gross margins are accretive to the consolidated averages, and we have maintained operating spend to be in a position to move quickly once we receive CHIPs. In addition, we have again incorporated elevated costs into our Q4 guidance as it relates to electronics, plastics, and logistics. In terms of operating expenses, we expect spending to be down a few million dollars sequentially. Below operating income, we expect other expenses net to be around $20 million in our fiscal fourth quarter. Our guidance is based on an effective tax rate of 21% and diluted shares outstanding of around $250 million for the full year. Finally, although we will update everyone on our fiscal 2023 guidance during our Q4 call next quarter, I would remind you that the headwinds related to higher input costs, the stronger U.S. dollar, and increasing interest rates are unlikely to subside in the near term. Like many other companies, we expect these headwinds to continue into our fourth quarter and into our fiscal 2023. To help offset these pressures, as we do every quarter, we seek out efficiencies in our business and strategically manage pricing where we have the opportunity. Although these temporary challenges are not unique to Hologic, they are important to consider for modeling purposes. To conclude, let me wrap up by saying that Hologic posted very strong third quarter results. underpinned by exceptional growth in molecular diagnostics and a healthy rebound in our surgical business. We are also once again raising our financial guidance for the year. Now, although future macro outlook remains cloudy, with a natural hedge to future COVID uncertainties, as well as an increasingly strong balance sheet and best-in-class cash flow, we are well-positioned to continue to deliver strong results for our shareholders. With that, we ask the operator to open the call for questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Also, in order to allow for as many questions as possible, we do ask that you please limit yourself to one question and one follow-up before reentering the queue. Once again, that is star 1 to ask a question. We'll take our first question from Jack Meehan with Nefron Research. Please go ahead.

Thanks. Good afternoon. I wanted to go into the molecular results and the 22% organic growth ex-COVID. If you look at the panthers you've installed over the last couple of years for COVID, is it possible to call out now what portion are running something beyond COVID now as well? And also within that result, can you just break out how much the vaginitis revenue was in the quarterly?

I think certainly in the U.S., the majority of our panthers are running more than COVID, for sure. I think we are really pleased with the vaginitis growth, but I don't think we're going to give the absolute number at this time.

Okay. And then on the COVID-19 side, it would just be great to hear from you what you're hearing from customers and the government around demand as we head into the fall and the winter, just specifically And you're going to be heading into guidance next quarter. Just any early thoughts around how you'll approach setting guidance for the first time for 2023 as it relates to COVID?

Yeah, I think when we get to that point, Jack, we'll probably continue to be conservative on the COVID side. It's been such a roller coaster for the last 27, 28 months or whatever that it's almost been hard to predict within a quarter. And, you know, we've watched a quarter start strong and then, you know, it dries up. And conversely, almost like this quarter last year, looked like everything was gone in July and August. And then the Omicron, you know, thing hit in, or Delta hit, you know, in September and things started to spike up. So we've had so many ups and downs that I think we'll be cautious as we forecast it. Having said that, You know, I think a lot of what we've said at the very beginning continues to play out. And for those who thought the business was going to be dead when vaccines came in, you know, 18, 19 months ago, we continued to say that we always thought this was going to leave a residual business that was probably going to be around for quite some time and might be one of our top three or four assays. And, you know, as we sit here today in the world with, you know, Japan and a whole bunch of other countries very high and the U.S., as you know, still running, you know, fairly rampant. And we said all along the goal of herd immunity was not going to be achieved in a mutating virus, that this thing would become more endemic and probably create an opportunity for us to have a more ongoing business. I think we would see that and full expectations as we go into next fall and winter. You know, this thing is not burned away from the world. So there will be some business. But I think we'll, you know, we'll certainly model it on the lower side as we go in because it's just, you know, we can count on our base businesses. This one truly is, you know, call it opportunistic or, you know, it's subject matter. You know, we can't put a linear forecast on it.

Thank you. We'll take our next question from Teja Savant with Morgan Stanley.

Hey, guys. Good afternoon, and thanks for the time here. Steve, one on the CapEx environment here. I know you mentioned, you know, demand for gantries is pretty strong. You don't see an elevated cancellation rate, et cetera. What's your sort of line of sight into the order book here? We've had some sort of mixed messaging from some of your MedTech peers, some of them not seeing any impact, others kind of like pointing to a softened CapEx environment here. So just curious as to get your take.

Yeah, we're not really seeing or hearing it from our customers. And I think, you know, to a large degree it's probably dependent on what customers products you're offering. Ours in the grand scheme are not a huge capital outlay for the hospital systems. We're also a both revenue and patient generating, top line generating procedure for the hospitals. So I think they will certainly find it. So I think we're not hearing it But I would say, as always, we're going to plan a little more cautiously and would expect that somewhere over the next couple of years, is there a little bit of contraction here or there? In all likelihood, if we go into a recessionary environment, the flip side is I think we've got pent-up demand. And I think even if there's a macro slowdown, we actually believe we've got some micro benefits working that will help us power right through that.

Got it. That's helpful. And then just to follow up on your commentary around the slope of the recovery here on the gantry chips, I know in the past you've talked about sort of having to figure out sort of construction timelines and installation timelines with your customers. Have you started to work on any of that here as you look to fiscal 23? And, you know, your comments around perhaps the full recovery having to wait until FY24 here, are they on the margin a little bit more cautious than, you know, what you had shared earlier?

I wouldn't say it's any more cautious. I think for anybody that's listened to the leaders of the semiconductor industry speak over the last, you know, six months plus, they've all been saying, look, recovery is not going to even happen throughout 2023 and it's going to go into 2024. And we're largely operating on kind of a quarter to quarter allocation right now. So we're at a cadence that is at least, you know, better than where it was. But I, you know, I do think it's important because, you know, for us to indicate that This doesn't come bouncing back miraculously, you know, on the day you flip a calendar to a new fiscal year.

Yeah, I would just add that, you know, our field service engineers are the ones who maintain the gantries and the install base are the ones that also do the install. So there's a balancing of our own resources to that recovery as well as hospital schedules.

Thank you. We'll now take our next question from Patrick Donnelly with Citi.

Hey, guys. Thanks for taking the questions. Steve, maybe one on the 23 setup. Again, I know you guys aren't going to give guidance, but in terms of the costs, and I know Carlene touched on a little bit there at the end, what's the right way to think about some of those, whether tire input costs, the dollar, obviously the supply chain on the chips? Is the expectation that kind of lingers throughout most of 23 and it's going to slowly work its way back, just in terms of thinking about the margin cadence, it seems like most models are kind of flipping pretty normal almost day one of 23. So just trying to wrap our heads around the right way to think about that cadence and some of that cost pressure lingering into 23. Again, not surprising that year 23 obviously starts pretty soon here. But just trying to get a handle on the right way to think about that piece.

Hey, Patrick, it's Carlene. Let me try to give you some insight there. So when you look at our Q4, the breast health revenue headwind is probably roughly 400 to 450 basis points of a headwind on operating margins. Now that, I think, as that business recovers over 23, that will come back over the course of 23. As far as costs, higher costs are probably about 200 to 250 basis points headwind on Q4. Now that, we think, might persist a little longer as inflationary pressures continue. So we think we've got a good line of sight to how we get improvement from where we end Q4.

Okay, that's helpful.

And then just on the molecular growth rates, you know, another question on that, obviously the number jumps off the page a little bit. Can you just talk through, Steve, I guess, what goes into that? Again, obviously the acquisitions rolling into it as they flip organic Obviously, Moby-Diag. Maybe just talk through kind of the different components, where the real drivers of strength were, because, again, I think that'll be a focus coming out of this. It's obviously a big number.

Yeah, clearly our new product launches, and especially BVCVTV, you know, as we've talked, the vaginitis panel is off to a very nice start. But it's kind of across the board. It's also still, you know, more customers that we sold earlier you know, more Panthers too during the pandemic that are now able to start to take on our core women's health assays. So I think what's remarkable is it's fairly dispersed growth, which I think both geographically and across product lines. So there's no one that completely dominates it. I think that's what gives us a lot of confidence for the future.

Yeah, I would say of the acquisitions, biotheranostics is probably the most significant component of growth in the quarter, as we would expect that one to be. Thank you.

And I'll take our next question from Derek Dubrun with Bank of America.

Hey, this is Nisarg on for Derek. So I want to start off on the margins. Do you guys still think the 32% to 33% range is the right way to think about fiscal year 23 margins?

So what I would say is when we have a normalized chip supply, that is exactly the way to think about them in that low 30s. I'd point to our Q2 of 20, which was 31.5% operating margin. We believe that is a normalized baseline, if you will. But again, that recovery on the chip is going to occur over the course of 23. We're still in that planning stage of how and when, so it won't be kind of Q1 out of the gate likely.

Gotcha, that makes sense. And then one more, like, have you seen any changes on the order book for breast health? You know, how much catch-up do you think we could see there as the chip shortage issues, you know, gradually go away in 23?

Yes, I think as we said in our prepared remarks, the sales teams are hitting quota that were set prior to the chip shortage. So, we haven't seen any deviation in the booking rate. And again, as Steve mentioned, no increase in the cancellation rate. So, We think the business is still solid. We're not losing any share. And then it will just be, again, availability of chips and the scheduling of the installs that we'll be working on to manage through the recovery.

Thank you.

We'll take our next question from Vijay Kumar with Evercore. Hey, guys. Thanks for taking my question. Carlene, I had two on the guidance side. One on breast imaging, I think the prior guidance had 250 million of headwind for fiscal 22. I think that number changed. It looks like 3Q came in better. What is that updated number, and what does it imply, breast imaging, headwind for Q4? Shouldn't Q4 be improving based on 3Q trends?

So you're right, we did guide to $250 million. It was $50 million in Q2, $100 million in Q3, and $100 million in Q4. We did slightly better, like you said, about $10 million better here in Q3. I think we're holding to the $100 million in Q4, again, because that favorability, Vijay, was done by kind of blood, sweat, and tears of reclaiming and recertifying circuit boards and just don't know if we'll continue to have those yields in this quarter. So we just, you know, stuck to be conservative and left 100 million for Q4.

That's helpful, Carly. Then one, I just have an OPEX question. If we look at the Q4 guidance at the high end, 870 of revenue, 65 cents, EPS, I think the guide implies OPEX on a dollar basis is sequentially flattish. If we analyze that Q4 number, I think they implied OPEX for next year, somewhere north of $1.2 billion. Is that math correct, just based on, I think, your commentary on you'd hold the OPEX line on the assumption that the chip shortage will resolve eventually?

Yeah, so again, Vijay, for 2023, we're still in the planning process, budget process, so not going to comment. But I would just, the only insight I would give you is that you know, with our partnership with the WTA is that the expense with that is loaded into calendar 22. So the most of that then expense is a disproportionate amount of expenses in our fiscal 22, which will be a tailwind as we get into 23 and 24. Thank you.

We'll move on to our next question from Mike Madsen with Needham.

Hi, guys. This is Joseph on from Mike. So I guess during the pandemic, STI rates seem to have spiked, and currently they still seem to be at or near record highs. Maybe just to start off, can you talk about maybe some of the barriers that are currently in place in the industry that, if removed, could, you know, increase screening rates? And then maybe a similar question, as we saw with COVID testing moving to the at-home testing Do you see this as a potential market for STI testing? And then, you know, if that were to introduce, I guess, what would be Hologic's solution there for staying competitive, and if that includes looking at at-home, you know, testing options?

Yeah, the first part of that in terms of barriers to STIs, you know, we did see a lot of call it inner city clinics and everything that either shut down or got their resources redeployed during COVID time from serving STIs and just serving their community folks to really focusing on COVID. So as some of those come back, I think we feel good about hopefully the ability to get back to more screening. And as you say, there's probably been an increase Certainly we've seen in many pockets of STIs during this time, so hopefully the ability to pick those up. On the idea of home testing, there's a lot more complications to women testing themselves at home in terms of administering the test and in terms of shipping it in a proper container or everything else. So candidly, we were approached by lots of companies in COVID time, who all were convinced that they were going to be the next great savior of home testing for COVID as well as home testing for STIs, that we're not as sure that market's going to move nearly as quickly to home testing when you actually think about the pragmatic realities of it. And so I think we continue to feel very good. We continue to broaden out our own portfolios, have partnerships. to be able to try to capture them. But I would not expect that market to move nearly as quickly as some companies might be hoping.

Okay, great. Yeah, that's very helpful.

By the way, I'd also say, if it were, it's where our cash balance puts us in really good position.

Okay, great. And then I did happen to see, I don't know if you guys already got a chance to look at it, but it seems that NCCN posted new guidelines for breast cancer screening and diagnosis. Just like a quick look at it, it didn't seem like anything really changed, more or less just solidifying diagnosis pathways, you know, based on your risk. But can you maybe talk about anything that was seen in that update? And then maybe just a similar question on that. What's maybe been the reception of some of the mobile mammogram screenings that Hologic has put out? How has that been received during the pandemic and recently?

Yeah, I think as it relates to guidelines, we continue to push for the proper guidelines. I think sometimes USPSTF and some other folks have gone too far. But in general, most of the folks, I think, are adhering to pretty sensible guidelines. And candidly, I think there's still a lot of pent-up demand. There's still a lot of women that put off their screenings during COVID time and are running behind. So I think we'll still catch up. In terms of the mobile, we made those available here or there. It's de minimis in terms of any real impact on the business.

Right, and we've been doing mobile mammograms well before the pandemic, really to reach underserved communities is really the intent there.

Thank you.

We'll now take our next question from Praneet Sudha with SVB Securities.

Yeah, hi, Steve, Carleen, thanks for taking the question. So first one, maybe for Carleen, how much of an offset are you getting today from repurposing of these prior boards and chips, and how much of that do you expect will happen in FY23 versus new chips?

Yeah, so it's pretty de minimis. So if I look at Q3, we did better than the original forecast at $100 million of headwind by roughly $10 million. So it's in the millions of dollars. And again, I wouldn't think that is going to be the most significant solution to the challenges of supply. It's going to be getting higher allocations.

Got it. Okay. And then, Steve, you know, on the first fiscal quarter call, you said, you know, corrections do create opportunities for Hologic at the right time, but valuation hadn't settled back at that time, in your view. So, you know, obviously, macro backdrop hasn't improved, but valuations have come down here meaningfully. So, Wondering if you have updated thoughts and views on how you're viewing the market and valuations now, given your sort of vantage point in the growing cash position and still strong cash flow.

Yeah, we like seeing some of the valuations start to truly settle in. The fascinating part always becomes people are always still looking at their past 52-week high and wanting premiums off of that, even though it's long since history. So the more time that goes by, we believe, puts us in a better position and really puts the potential sellers in a more realistic position. We feel great right now being patient. And feel like, you know, we, we don't see something that's going to snap a lot of these, you know, especially earlier stage or smaller companies back. And we're looking both early stage. And we're also looking at things that, you know, bring some legitimate EBITDA, uh, in this time, but really like our position. Uh, but, and, and we're in no, no urgent, uh, need given the strength of our base business to act, which I think also just puts us in a much better place. Um, while these companies come to grips with their true realities.

Thank you. We'll now take our next question from Casey Woodring with JP Morgan.

Hi, guys. Thanks for taking my questions. I guess the first one, so on the diagnostics growth rate here, I'm wondering how much of that was pent-up demand from the last quarter or two? So, you know, last quarter you guys made the comments that women's wellness visits have softened given COVID impact. So curious to hear if there's a catch-up in visits this quarter and if there's, you know, some more pent-up demand here left in 4Q and maybe even the beginning of fiscal 23.

Yeah, it's probably a little bit. You know, I think it's just, it's so hard for us to say that these things just keep ebbing and flowing by geography. You know, both within the U.S., you see, you know, regions that moved to different paces in COVID time and certainly on a global basis, different countries. So it feels like a little bit of pent up, but I wouldn't say that created a big bolus. I think it's just it more allowed a lot of the visits to come through that weren't happening before. So I think it's a pop, but it's not like it was necessarily restrained. So, and again, hard to exactly know. We don't have that information from, you know, our customers or anything else. But I think it's where we just keep saying, let's keep watching these trends over time.

Got it. And then just on the international diagnostics piece, you know, you called out 16.5% ex-COVID growth was driven by virology. You know, you didn't mention women's health there. So I guess, can you just sort of remind us how much of that diagnostics business you have is outside the U.S. And if there's material greenfield opportunity on the molecular side with women's health, especially given all the Panthers you've placed. Thank you.

Yeah, it's still, you know, our molecular business outside the U.S. has been underdeveloped. And I think that's been one of the magical pieces of the, you know, being able to play so many Panthers during the pandemic and that we're very excited about the opportunity really in the core women's health business, which has also been underdeveloped. So it's a combination of both the virals and the core women's health as we start to transition from some of those panthers internationally that were used for COVID into our core business. And I think that's something we expect to be generating certainly double-digit growth internationally for quite some time in that molecular business.

Thank you. We'll take our next question from Max Miscucci with Cowden & Company.

Hi. Thanks for taking the questions. First one, I think you're nearly done integrating biotheranostics lab operations into the San Diego headquarters. It's not finished. The growth is tracking nicely there. So once biotheranostics is fully settled in to the San Diego headquarters, How motivated will you be to pursue additional M&A deals for, say, a breast-focused specialty lab that you would be able to serve with biotheranostics, the new lab operations and the commercial team that's in place?

We're continuing to look at all options. I think what we do feel good about, and as you say, Max, we did a whole bunch of acquisitions in a relatively compressed period of time. and then really had to digest those. And I think between biotheranostics, which is not fully integrated, we're probably slightly behind exactly your rosy synopsis here. We're integrating it into the San Diego facility and moving the CLIA lab in and all of that, but we still have a little bit of work to be done. You know, the same with Diagenode and MobiDiag getting integrated nicely, Boulder, Assessa, those have all been being integrated to where I would say We're getting to the point where we can certainly handle more integrations, but we're casting the net fairly broadly within our existing state of business, the existing three businesses. Got it.

And then just sort of following up there, if you look at all of the companies and the products that you have integrated over the past 18 to 24 months, You know, which of the recently acquired, you know, products or services, you know, whether it's a SESA or some of the expanded interventional breast offerings, which of them have benefited the most, you know, under Hologix ownership, you know, or when they started being marketed alongside some of your, you know, cornerstone marquee products?

I think they're all benefiting very nicely. You know, if you think about what we've been able to do from a covered lives standpoint within Hologix, assess early stages, even for Boulder, our surgical sales force is dying to get their hands on it. It's been more a supply issue that we've been holding them back a little bit while we ramp up. You know, biotheranostics, that team, when you talk to the commercial leader of that team, you know, very excited by what the Hologic team and breadth and marketing capabilities and, you know, everything have brought to that business as well. The Diagenode and MobiDiag teams, I think also in Europe, very excited, particularly having to just have gone through the whole IVDR process, which it was a hugely labor-intensive business now to get that behind us and really focus to the future. So I think they're all looking at us and saying, you know what, the nice part is they're proud to be a part of us. I was talking to a CEO of another company recently who'd actually been involved in one of ones we'd bought, and he was still close to one of the members of the team at the company we bought, and he said, you know what? That team loves being a part of Hologic. And that's exactly what we always want to strive for. So I feel pretty good that, you know, each of them are really fitting that bill.

Thank you. We'll now take our next question from Ryan Zimmerman with BTIG.

Thanks for taking the questions. And I wanted to just ask one, Carly and it's already been asked a lot about op margins for next year and, and, you know, appreciate the color there. I think you had said, you know, maybe a 400, 450 basis point headwind on op margins, and that'll come back over 23 in a normalized environment. But, you know, if I look at the fourth quarter number next quarter, op margins are kind of sitting at 26%. And so you add back, you know, kind of that 400 basis point dynamic and it puts it closer and maybe I'm splitting hairs here, but closer to 30%. And, And I just want to know if I'm thinking about it the right way versus in, again, a normalized environment, 32-ish percent, 31.5. Are we still maybe 100, 150 basis points off of kind of that normalized margin as we enter 23? And then I have a follow-up.

Yeah. So I think beyond, as I talked about, the 400 to 450 is the higher cost of roughly 200 to 250, which You know, from a planning perspective, we don't have line of sight to that resolving, but eventually that will resolve. And I think the other piece with some higher marketing expenses, which is probably about another 200 basis points headwind to up margin, that will also abate over 23. So we have clear line of sight back to those normalized margin levels.

Okay. That's helpful, Caller. And then if I think about it, I think Moby-Diag laps next quarter in terms of you know, the time of acquisition becomes organic. The disclosure today for both Moby-Dag and Boulder was about $8 million. If I go back to the revenue contribution for Moby-Dag, I think it was something in the 40s. I just want to understand kind of how that's tracking relative to maybe its previous disclosures. Maybe I'm misunderstanding.

Yeah, so it's tracking a little bit below that, and there's two reasons. One, that forehandle would have had COVID revenue in there that has come down, that COVID revenue was on their legacy AmpliDiag platform, not the NovaDiag platform. And as well as there's been some supply chain challenges, we've worked through those, and we're ramping up inventory to kind of go hard commercially at the beginning of 2023. So a couple of choppiness here in the year, but feel still really good about what that's going to do.

Thank you. We'll take our next question from Andrew Cooper with Raymond James.

Thanks for sneaking me in here. A lot's already been asked, so maybe I'll just give one quick one and let everybody go on. So on MobiDiag, maybe just an update on Novodiag potentially coming to the U.S.

and sort of what the latest and greatest thinking on the pathway there and what we could be looking for for that product.

Yeah, I think to Steve's earlier comments about the benefits of these acquisitions in Hologic's hand, I think our R&D teams have spent a lot of time in Finland. The MoeDiag teams have come to San Diego to really work through what that clinical roadmap is for approval in the U.S., and I think we're in a much better position of understanding of what is required for approval in the U.S., and that understanding, based on our expertise, has pushed out the timeline a little, so looking now more like early 2025, but You know, we still feel really good about that acquisition, feel good about what's going to happen with the EU approvals that we already have here in 2023.

Okay, great. I'll stop there, given the time. Thanks.

Thank you. Great.

Thank you. And this now concludes Hologic's third quarter fiscal 2022 earnings conference call. Have a good evening.