Hologic Inc. (HOLX) reported third-quarter fiscal 2014 adjusted earnings of 37 cents per share, down 2.6% from the year-ago level but ahead of the Zacks Consensus Estimate by 3 cents. The adjusted number also steered ahead of the company’s guidance range of 33−34 cents.
On a reported basis, the company recorded net income of 4 cents per share, much ahead of the net loss of 4 cents per share reported in the prior-year quarter.
Revenues in Detail
Revenues were $632.6 million in the quarter, up 1.0% year over year. The top line also exceeded both the Zacks Consensus Estimate of $621 million and the company’s guidance range of $615−$625 million.
In the quarter, Hologic’s key products, especially 3D mammography, molecular diagnostics business lines and surgical business gained momentum. In addition, service associated with the company’s large and growing installed base of digital mammography systems also showed improvement.
Despite a decline in adjusted earnings, the company is hopeful about stabilization of its business by the end of the year and expects to return to growth in 2015. According to the company, its results so far in this fiscal indicate a faster-than-expected return to growth.
Although one quarter’s performance does not establish a trend, Hologic continues to believe the near-term growth opportunities will potentially offset the ongoing headwinds.
Segments in Detail
The Diagnostic segment (46.3% of total revenue) was down 1.5% year over year to $293.1 million in the quarter. While international revenues declined 3%, domestic revenues in this segment slashed 9%. This was primarily a result of lower U.S. sales of ThinPrep due to ongoing screening interval expansion, and a decrease in average selling prices based on customer mix. However, this was partially offset by a 7.0% increase in the company's molecular diagnostics franchise, primarily from the core Aptima product line.
Breast Health segment (37.6%) improved 3.5% year over year to $238.7 million. Growth was driven by 3D mammography systems, as well as continued service revenue growth from the growing installed base of digital mammography systems. The company is perfectly on track to meet its goal of installing at least 500 3D mammography systems in the U.S. in this fiscal. However, an overall sales decline in 2D systems, as customers continued to shift to 3D, weighed on the growth partially.
The GYN Surgical business (12.4%) recorded revenues of $78.5 million, up 3.5% from the comparable prior-year period. This increase was on account ofgrowth in MyoSure system sales partially offset by slower decline in NovaSure system sales in the U.S. Revenues from Skeletal Health (accounting for the rest) inched up 0.9% year over year to $23.0 million.
Operational Update
Hologic’s adjusted gross margin was 62.2% in the reported quarter, up 28 basis points (bps) year over year and in line with the company’s fiscal guidance range of 62%. The margin expansion was on account of higher-than-expected revenues, a favorable product mix and a favorable geographic mix.
In the reported quarter, adjusted operating expenses amounted to $200 million, up 4.7% year over year. Accordingly, adjusted operating margin was 30.5%, a contraction of 83 bps year over year.
Financial Update
Hologic exited the quarter with cash and cash equivalents of $638.4 million compared with $829.4 million at the end of fiscal 2013. Total long-term debt as on Jun 28, 2014 was $4.27 billion, down 11.2% year over year.
Guidance
The company provided its business outlook for fourth-quarter fiscal 2014 and updated the full year guidance. For the said quarter, the company expects adjusted revenues of $630−$640 million resulting in adjusted earnings of 36−37 cents per share. The Zacks Consensus Estimate for revenues and EPS of $623 million and 34 cents respectively, fall below the predicted range.
For the full year, the company increased its expectation to report adjusted revenues of $2.50−$2.51 billion (from the previous projection of $2.46 billion to $2.49 billion). The current Zacks Consensus Estimate of $2,481 million remains below the revised guidance. The company also upgraded its adjusted EPS guidance to the range of $1.44−$1.45 from the earlier range of $1.37−$1.40. The Zacks Consensus Estimate of $1.39 falls in line with the new guidance.
Our Take
Hologic’s performance in the fiscal third-quarter surpassed expectations on both the earnings and revenue fronts. Although the company is plagued by challenges like decline in revenues from the core segment and ongoing shift to the 3D tomosynthesis technology, management seems strategically prepared to get over these challenges. The major goal of management is to sustain top- and bottom-line organic growth going ahead.
The strategy lies in accelerating the performance of the major growth drivers of the company, i.e. Diagnostics, Breast Health and Surgical, and establishing a strong foothold globally. The raised fiscal guidance also reinstils our faith in the company.
Currently, Hologic carries a Zacks Rank #3 (Hold). Some well-ranked stocks in the broader medical sector are Align Technology Inc. (ALGN), Sirona Dental Systems Inc. (SIRO) and McKesson Corporation (MCK). All the three stocks carry a Zacks Rank #2 (Buy).
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