Hologic Inc (HOLX) 2022 Q1 法說會逐字稿

Good afternoon, and welcome to the Hologic First Quarter 2022 Earnings Conference Call. My name is Ron, and I'm your operator for today's call. Today's conference is being recorded. (Operator Instructions)

I would now like to introduce Ryan Simon, Vice President, Investor Relations, to begin the call.

Thank you, Ron. Good afternoon, and thank you for joining Hologic's First Quarter Fiscal 2022 Earnings Call. With me today are Steve MacMillan, the company's Chairman, President and Chief Executive Officer; and Karleen Oberton, our Chief Financial Officer.

Our first 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 March 4.

Before we begin, I 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 be discussing certain non-GAAP financial measures. A reconciliation to GAAP can be found in our earnings release. One of these non-GAAP measures is 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 1 year.

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 MacMillan, Hologic's CEO.

Thank you, Ryan, and good afternoon, everyone.

We are pleased to discuss our financial results for the first quarter of fiscal 2022. Once again, our results are strong. We are off to a great start in all divisions with Diagnostics, Breast & Skeletal Health and Surgical, each delivering more than 8% global organic growth excluding COVID revenue.

For the quarter, revenue was $1.47 billion and non-GAAP earnings per share were $2.17. Both numbers significantly exceeded the high end of our guidance by 28% on the top line and 74% on the bottom.

Over the last several quarters, and most recently at the JPMorgan conference, we've been communicating 3 major themes. First, our base business is stronger with more diverse growth drivers than ever before. Second, as the COVID pandemic remains, we continue to help meet the world's testing needs and generate financial upside. And third, because of the first 2 points, we are well positioned to generate strong results regardless of how various uncertainties evolve, from the pandemic to supply chain challenges to health care utilization. In other words, you can count on us to deliver in today's uncertain business environment.

These themes are certainly playing out as we look at our first quarter results and our dramatically improved outlook for the fiscal year. Our base businesses are performing well, and we are making a massive difference against COVID. As a result, we are raising our revenue and earnings guidance significantly as we expect upside from COVID-19 testing, along with strength in our Diagnostics and Surgical businesses to more than compensate for temporary supply chain challenges that have emerged in our Breast Health business.

As we shared at JPMorgan, we are a fundamentally different company than 8 years ago. Now more than ever before, Hologic has more diverse and higher-margin recurring revenue across each division in each geography around the world. Our strong performance is a result of execution against our strategic plan and has been accelerated by our financial success during the pandemic. As evidenced by our Q1 results, we are well positioned for long-term sustainable growth regardless of the direction the pandemic may turn.

While we can't predict the future path of COVID, we'd like to expand today on what we do know, that Hologic is emerging from this pandemic a much stronger company. More specifically, we will focus on what we know in each division that gives us clear confidence in our ability to maintain sustained growth over the long term.

First, in our Diagnostics division, we know that our huge industry-leading installed base of automated high-throughput Panther systems, along with our robust menu of 19 assays across Panther and Panther Fusion, will drive strong growth well into the future. Today, our Panther installed base is over 3,000 units, 75% larger than prior to the pandemic, with almost half of these placed internationally. Of note, demand for our Panthers is still strong globally. We placed well over 100 Panthers in the first quarter alone, more than double our pace prior to the pandemic. At this stage in the pandemic, this clearly indicates that customers expect to use these systems for non-COVID testing.

Utilization of our Panther systems is also strong. We are seeing clear signs that customers are leveraging our menu of 19 assays on our significantly expanded Panther footprint. First and foremost, the growth of molecular diagnostic sales reflects this growing utilization. For Q1, our core Molecular Diagnostics franchise grew 14% worldwide, excluding COVID revenues, product discontinuations as well as recent M&A activity.

Now we know a question on some people's minds is, will these Panthers be used post pandemic? The answer is an emphatic yes based on the following: First, nearly 90% of U.S. COVID customers are already running at least one other assay. This speaks to our customers being bonafide molecular diagnostics players who are invested in molecular testing for the long haul and who we expect will adopt more of our assays over time. And second, the incredible automation and workflow simplicity of the Panther, which dramatically minimizes labor activity and costs. In a labor restricted world, our customers realize the enormous advantage of our Panther system.

Extending and broadening the adoption of our portfolio of assays is a fundamental element of the Diagnostics growth strategy. Our sales teams have done a tremendous job winning strategic accounts, strengthening our relationship with customers and fueling our razor-razorblade business model with both legacy women's health tests and new assays.

As an example, leveraging our leadership in women's health, our vaginitis panel is off to a great start with $13 million of revenue in the first quarter, roughly 2.5x the first quarter of 2021. We are extremely proud of the panel's success and believe this will be our most successful diagnostic launch ever, COVID aside.

In Q1, we also once again responded to our customers' COVID testing needs and generated significant financial upside. We posted $523 million in COVID assay sales, over $300 million more than our outlook and consensus. Clearly, COVID is sticking around longer than anyone would like. And just as clearly, highly accurate molecular testing continues to play a major role in fighting the pandemic. We continue to believe COVID testing will contribute materially to our business for the foreseeable future and we remain prepared to meet ongoing demand globally.

Second, shifting to our Breast & Skeletal Health business. We know that broadening across the continuum of breast health care from screening and diagnosis through surgery and treatment has transformed this franchise from a once capital-dependent business to a division with more diverse, higher growth recurring revenue. In the first quarter, the Breast Health business grew 8.4% as we've maintained our high market share and continue to grow our installed base of Genius 3D Mammography systems. The attachment rate of service on this gantry base continues to remain strong at more than 80%, making service one of our largest top line contributors company-wide. And we continue to upgrade our installed base with high-margin software and AI.

The Mammography capital business is and will continue to be a meaningful and foundational part of our Breast business going forward. In addition, we've built a solid adjacent portfolio of more recurring interventional breast surgery products that is driving the growth of the division. These interventional products include markers, needles, including those used in our Brevera biopsy system, and handheld devices.

Sales are more recurring in nature with higher projected growth compared to the legacy capital business. As points of reference, today, the gantry business is only 23% of Breast Health revenue compared to 29% in 2014, and interventional sales have grown to roughly the same size as gantry revenue. We expect the Interventional business to continue its growth and further transform our Breast & Skeletal division going forward.

The increasing diversity of our Breast business will help us offset supply chain challenges that have emerged recently, specifically shortages of computer chips in our Mammography and other imaging systems. Our updated guidance incorporates a temporary but meaningful revenue headwind for the balance of our fiscal year. Despite this, as Karleen will discuss, we are raising our revenue and EPS guidance significantly based on outperformance in COVID, core molecular and Surgical.

Now shifting gears to Surgical. We know that the diversification of the business will drive growth. Despite pandemic headwinds, the division grew 8.2% in the first quarter, and we continued to solidify our market-leading positions for NovaSure and MyoSure. With the addition of the Acessa procedure and the close of the Bolder acquisition in late November, our Surgical business has a very different profile today with more growth engines than ever. Acessa revenue in Q1 was nearly 3x a year ago, and the Bolder integration is off to a great start as we are already seeing Bolder sales through the Hologic Surgical sales team.

The recent launch of NovaSure V5, developed in-house, is also seeing good traction. It's early days, but we are seeing a lot of excitement in the field around this product. We are committed to maintaining our leadership position in this space with best-in-class products.

Further, the Fluent Fluid Management System, also developed in-house, is used to streamline the complexities of fluid management in hysteroscopic procedures. Fluent is another great example of organic innovation driving future growth.

Fourth and finally, we know that our international business will be a consistent contributor of growth for years to come. We are no longer the export business of prior years. Through organic growth and M&A, we are direct in more regions than ever before, especially in Breast Health, with our feet firmly on the street and engaged with customers.

In Q1, the international business achieved nearly 13% organic growth, excluding COVID, and we expect strong growth to continue. With the leaders we have in place today, we are confident the foundation we've laid and the progress we've made will yield strong results for many years to come.

To add additional perspective, there are over 3.9 billion women in the world with only about 170 million of them in the United States, which is our largest market today. Clearly, we have an opportunity to impact more lives and more women around the world. Through our groundbreaking initiatives like the Hologic Global Women's Health Index, in conjunction with the opportunity we've earned as leaders in the fight against COVID, we are connecting with world leaders and change makers to elevate women's health around the world.

In summary, our first quarter results and improved outlook demonstrate that Hologic is a much different and much stronger business than ever before, stronger through diversification and stronger from our leadership in COVID molecular testing. These factors are generating exceptional cash flows and a pristine balance sheet that are especially valuable in the midst of uncertain market conditions.

As we've done for the duration of this pandemic, we are confident in our ability to manage our business through various uncertainties and continue to deliver strong growth regardless of how external conditions evolve. What is clear to us at Hologic is that we are poised to continue our strong growth. Whether COVID wanes or continues, we have fundamentally changed our business into one with more growth drivers and more recurring revenue across all geographies. This gives us the clear confidence that we can navigate change and continue to generate exceptional financial results.

With that, let me turn the call over to Karleen.

Thank you, Steve, and good afternoon, everyone. We are very pleased to share first quarter results that have significantly exceeded our guidance on both the top line and bottom line. Our first quarter highlights an improving base business that grew 9% organically, excluding COVID-19 revenues.

As Steve mentioned, our diversified business model is paying off. Each of our franchises, excluding COVID, grew more than 8% in the quarter, broadly exceeding our long-term revenue growth target of 5% to 7%. It is also important to note that our base business strength occurred in a quarter that started with the Delta wave and ended with COVID cases surging due to Omicron.

Total revenues for the quarter of $1.47 billion showcased strength in every business and was significantly ahead of our previous guidance. EPS of $2.17 in the first quarter far surpassed our initial guidance range of $1.15 to $1.25.

We also continue to generate healthy free cash flow, funding our capital deployment priorities of tuck-in M&A and share repurchases. We believe our balance sheet is a significant advantage in times of market uncertainty, which I'll touch on shortly.

Before I do that, let me provide some detail on our divisional revenue results. To provide clarity on our performance, I will exclude the impact of COVID-19 where applicable.

In Diagnostics, global revenue of $950.4 million declined 15.2% compared to the prior year. However, excluding COVID assay sales, related ancillary items and a small level of discontinued products, worldwide Diagnostics revenue increased just over 10%.

To better understand the underlying performance of our non-COVID molecular business, I will again exclude COVID-19 benefits. By doing this, base molecular revenue grew about 14% organically in the first quarter. The growth was driven by strong execution across our global portfolio as our largest non-COVID assay, chlamydia gonorrhea, was above prepandemic levels. Our newer vaginitis panel contributed well ahead of last year's run rate. And internationally, we continue to see strong demand for our Panther instrumentation.

For perspective, our annual molecular business, excluding COVID, is now more than $100 million larger than before the pandemic. As it relates to our COVID-19 results, we continue to forecast conservatively but act aggressively behind the scenes to meet demand for our customers.

In the quarter, we generated $523 million of COVID assay revenue and shipped about 26 million tests to our customers. The United States represented about 60% of total COVID assay revenue although demand was high around the world.

Rounding out Diagnostics, Cytology & Perinatal grew 5% compared to the prior year, a nice result that was also above 2019 levels.

In Breast Health, global revenue of $359.3 million grew more than 8%. This growth was driven by our Interventional business as Steve highlighted, which was up nearly 20% in the quarter. Breast imaging and service also increased mid-single digits in the period, underscoring resilience in the face of COVID headwinds.

Our strategy to diversify and increase recurring revenue continues to pay off. In Surgical, first quarter revenue of $134.3 million grew 8%. This solid performance was driven by a nice rebound in NovaSure from the launch of our next-generation V5 system as well as momentum from new products such as Fluent and Acessa. While our surgical business was impacted by pullbacks in elective procedures, the impact was minimal in the quarter. We continue to stay close to our customers, monitoring the Omicron surge and related staffing issues, which we do expect to be a headwind in Q2.

Lastly, our Skeletal business had revenue of $27.1 million, increased 10% compared to the prior year period.

Now let's move on to the rest of the P&L for the first quarter. Gross margin of 72.1% significantly beat our forecast, driven by higher-than-expected COVID-19 test volumes in the period. Total operating expenses of $333.9 million increased 22% in the first quarter but were down 5% sequentially compared to Q4.

We continue to reinvest for future growth with incremental spending in R&D and marketing, pulling forward initiatives given the benefit from COVID-19. Further, within our operating expenses, the inclusion of recent acquisitions accounted for a spend of approximately $30 million in Q1, and we also made additional charitable donations in the quarter.

Finally, our non-GAAP tax rate in Q1 was 21.5% as expected. Putting these pieces together, operating margin came in well above our forecast at 49.4% and net margin was a very strong 37.7%. Non-GAAP net income finished at $554.7 million and non-GAAP earnings per share was $2.17, nearly 75% above the top end of our prior guidance.

Moving on, cash flow from operations was $564 million in the first quarter, a very strong result which was more than 100% of non-GAAP net income. These robust cash flows continue to give us tremendous financial and strategic flexibility. For example, in the quarter, we repurchased 2.3 million shares of our stock for $167 million and closed the acquisition of Bolder Surgical for $160 million.

We continue to evaluate M&A that strategically fits well within our existing sales channels or is a near adjacency. Based on our strong operational performance, we had $1.4 billion of cash on our balance sheet at the end of the first quarter, and our leverage ratio was 0.6x. Our capital structure is as strong as it has ever been. And we intend to deploy our excess cash on division-led acquisitions as well as share repurchases that improve our top and bottom line growth rates. For example, we have been buying shares under our 10b5-1 plan within our second fiscal quarter to take advantages of market volatility.

Finally, ROIC was 29.4% on a trailing 12-month basis, an increase of 270 basis points compared to the prior year.

Before we discuss our increased guidance for the second quarter and full year fiscal 2022, I want to mention a few key points. Although the pandemic remains highly uncertain, we believe we are well positioned either way it may turn. Should there be future outbreaks, we will meet our customers' need and generate additional COVID testing revenue, or should the pandemic subside, we expect strong performance in our base businesses. We believe we are nicely hedged against macro end market volatility.

As it relates to supply chain headwinds, these challenges have become more specific in recent weeks. Due to the lack of available chips, we expect a temporary shortage of supply that will lengthen delivery time lines for Mammography capital in our Breast Health division. While we hope to mitigate these effects, for conservatism, we are estimating around $200 million of revenue will be pushed out of fiscal 2022. This includes up to $50 million headwind in our second quarter as we are proactively beginning to extend lead times of new units to preserve inventory and maintain service continuity for gantries already in the field. This headwind is purely a supply issue and not one of underlying demand, which remains strong.

Despite the supply shortage, we are significantly increasing our full year revenue outlook. Underscoring the evolution of our diversified business model, we expect our Diagnostics and Surgical businesses along with COVID contributions to more than offset Mammography headwinds.

Now let me move on to our specific guidance. In the second quarter of fiscal 2022, we expect very strong financial results again with total revenue in the range of $1.25 billion to $1.3 billion. As a reminder, our Q2 revenue is usually seasonally lower than Q1. For all of fiscal 2022, we expect total revenue in the range of $4.4 billion to $4.55 billion, significantly exceeding our prior full year guidance by $600 million at the midpoint.

Given the recent strength of the U.S. dollar and to aid with constant currency modeling, we are assuming foreign exchange headwinds of approximately $23 million in the second quarter of 2022 and $56 million for the full year.

In Diagnostics, molecular continues to be the growth engine based on our larger Panther installed base of over 3,000 instruments globally. Further, we are seeing encouraging uptake of new assays like our vaginitis panel as well as tremendous international expansion opportunities and a rebound in our core STI assays. As a result, for fiscal 2022, we expect our base Diagnostics franchise inclusive of Cytology & Perinatal to grow high single digits.

In Breast Health, our organic and inorganic investments continue to perform well. For example, Brevera is off to a great start in 2022, growing in the high-teens for the quarter. Further, recurring service revenue represents approximately 40% of total sales in Q1.

Finally, in Surgical, we expect MyoSure to continue to drive growth with help from better NovaSure performance. In addition, we expect new products and the recent acquisitions of Acessa and Bolder to add momentum to an already fast-growing franchise. Like base Diagnostics, we expect Surgical to grow our long-term organic guidance -- grow above, I'm sorry, our long-term organic guidance for fiscal 2022.

In terms of COVID assay sales, the only certainty is that no one really knows how demand will progress for the rest of the year. Therefore, as we have done for the past several quarters, we are forecasting conservatively and will act aggressively. With that in mind, we expect COVID assay sales to be at least $400 million in the second quarter of 2022 and at least $1 billion for the full year.

COVID-related items, including revenue from discontinued products in Diagnostics, are expected to be approximately $50 million in the second quarter and $190 million for the full year.

As a reminder, our organic guidance backs out of revenue from acquisitions until the first full quarter after the deals annualize as well as revenue from our divested Blood Screening business. We expect Blood Screening revenue of $5 million to $6 million in Q2 and $20 million to $25 million for the full year. In total, we are backing out roughly $110 million of inorganic revenue for the year.

To appreciate the underlying growth of our business, it is important to back out of organic revenue COVID assay sales, related ancillary items and a small amount of discontinued product revenue in Diagnostics. On this measure, and excluding the previously mentioned supply chain headwinds in Breast Health, we expect the rest of Hologic to grow at least at the high end of our 5% to 7% long-term guidance.

Moving down the P&L. For the full year, we forecast our gross margin percentages in the mid-60s and our operating margin percentage to be in the mid- to high 30s. Both estimates are higher than our guidance last quarter. We expect both percentages to decline sequentially throughout the year, consistent with our conservative planning that most COVID demand will occur in the first half.

In addition, we have incorporated additional inflationary supply chain costs into our guidance as it relates to electronics, plastics and logistics. Despite this, for the full year, both gross and operating margins should be well above pre-pandemic levels.

In terms of operating expenses, we expect spending to be up compared to 2021 but decline sequentially in the back half of the year. As we've continued to highlight in quarters with higher COVID testing revenue, we will take the opportunity to invest more for future growth.

Below operating income, we expect other expenses net to be a little less than $25 million a quarter for the remainder of the year. Our guidance is based on an effective tax rate of 21.5% and diluted shares outstanding of around 256 million for the full year. All this nets out to expected EPS of $1.50 to $1.60 in the second quarter, well above current consensus estimates and $4.90 to $5.20 for the full year, 36% above our prior guidance at the midpoint.

As you update your forecasts, let me remind you that macro uncertainty due to the pandemic and related supply chain challenge is still high. We would therefore encourage you to model at the middle of our ranges, which incorporate both potential upsides and downsides.

Let me wrap up by saying that Hologic posted very strong first quarter results that far exceeded expectations and guidance. We are also significantly raising our financial guidance for the year, highlighting the multiple growth drivers we have added to each of our franchises and the upside to our business from capturing demand for COVID testing. With organic investments, multiple acquisitions and additional financial flexibility for capital deployment, we are a much stronger company than 2 years ago and well positioned to prosper in the face of various uncertainties.

With that, I will ask the operator to open the call for questions. (Operator Instructions)

(Operator Instructions) We'll take the first question from the line of Dan Leonard with Wells Fargo.

My first question on capital deployment, could you elaborate or offer a bit more color on how aggressive you plan to be on the capital deployment front as cash builds on the balance sheet?

Yes. I think what we've talked about is managing our free cash flow that we want to fully deploy our annual free cash flow between tuck-in M&A and share repurchase. But having said that, Dan, we obviously will continue to be disciplined as it relates to tuck-in M&A. That would be the priority. So we might let some cash build on the balance sheet while we're, again, disciplined and looking for the right deals.

And then an unrelated follow-up. Have your views on endemic COVID testing needs evolved at all?

We believe COVID will be endemic. And we believe there will be ongoing molecular testing and probably feel even stronger about it than ever, right? If you go back 2 years ago, none of us would have imagined we'd be having the amount of testing going on now. And at the end of the day, I think most governments and most people around the world have realized while there's antigen testing out there, for true population health and, frankly, to truly capture what's going on, molecular is the answer. And I think we feel better and better that that's going to be an ongoing part of our business for many, many years. This is a -- it's a virus. It mutates. And Omicron is not the last mutation of this thing. And I think we feel that we're well poised.

We'll take the next question from the line of Vijay Kumar with Evercore ISI.

Just one on the supply chain that you brought up, Steve. What -- I guess, is this on the Breast Health segment? Or which segment is this impacting? And I'm curious what -- we've been hearing this from other companies. I feel like when we had the guidance a few months ago, right, things weren't as bad. And how did things changed in the last few months? And what's been the base guidance reduction because of the supply chain impact? Because I do feel like other parts of the base business are coming in better. So maybe if you could just talk about if the gross impact from supply chain was $200 million of revenue push out, how much of that was offset by better base performance?

Yes. Certainly, some of it is, as we've highlighted with both Surgical and Diagnostics base businesses strengthening. And just as we've forecasted COVID conservatively, we want to put that out there. You don't have to -- anybody that's looked around at supply chain issues, the semiconductor and chip issues have not gotten better. And we're not totally sure exactly when that will fully work its way out. We're lengthening lead times for our deliveries. And it is -- it's all in the Breast Health primarily in the gantry business. And we've got to obviously maintain some chips for service. So we're being conservative in taking care of our existing customers and will lengthen and -- frankly, it will make next year probably look better. And it's great we can absorb this, what I'd call annoyance right now when the rest of the businesses are firing.

Yes. I would just build on that, Vijay, is that I think what we have here in Q2 is we have inventory to cover that $50 million of revenue shortfall, but we're actively allocating, to Steve's point, to service. Because that's the most important thing, is that we've got inventory to keep that installed base up and running so that women can get back to screening.

Understood. And then maybe one follow-up on -- I think the prior guidance had $150 million contribution from M&A. Did that change, Karleen? And Steve, I think you mentioned something about 90% of U.S. Panther customers, they're using an additional assay, right? Maybe talk about what kind of assays are they using? Are these CT/GC high-volume? What kind of revenue pull-through can we expect post pandemic given the higher installed base?

Yes. Yes. So I think on the total revenue from acquisitions in 2022 is roughly $170 million. And then we talked about the inorganic piece that we're pulling out that's $110 million. And I think you went to another question there on the assays. I think certainly, the FTI assays are our biggest assets. So I would say that a lot of customers, that would be primarily what they're running.

And we'll now take the next question from the line of Jack Meehan with Nephron Research.

Wanted to maybe continue on that path. Steve, your comment around the vaginitis panel. I feel like it's a pretty big statement to say you think it could become your most successful launch outside of COVID. If memory serves me right, I'm pretty sure chlamydia gonorrhea is an over $300 million business for you. So maybe just talk about the adoption you're seeing, like what you think the ramp looks like for revenue?

Yes. I think clearly, it's taken us a long time to get chlamydia gonorrhea up into that multi-hundred million range. But I think we feel really -- so this is going to be over years. But I think we're feeling pretty good about that ramp. You figure if we just did $13 million in the first quarter, multiply that by 4 and you've got the very bare minimum of, I think, what we expect to do this year. So that will probably continue to build through the quarters. And I think as we fast-forward a few years from now, it certainly goes north of 100 and on its way to 200.

Yes. And I think when we talk about the launch, I think for comparison, Jack, if you think about the Trich assay. it took about 5 to 6 years to get to that $70 million, and we're getting close to that here only a couple of years out. So that's kind of the success of the launch that I want to highlight.

It's a very meaningful indication. It's been completely underdiagnosed. And I think it's part of the rapid uptake. And it's really a prime reason to go to the doctor.

Right. And then I also wanted to follow up just on the supply chain point. I'm looking at the -- in my model, the breast imaging product sales. It didn't look like you really had much of an impact in the fiscal first quarter. So is this something that really is just kind of picking up in the last few weeks? And $200 million in context seems pretty significant in light of that line item. So maybe just help put a little bit more color around that would be helpful.

Yes, it clearly has emerged. We kept hoping we would find solutions. I've watched our operations team over the last couple of years. They've just been a Herculean first on MTUs, on Tecan tips, on swabs, on glass tubes, on everything we did to scale during COVID time to -- getting more Panthers out the door. And we were hearing a lot of the issues from our chip suppliers but kept thinking we would find some alternatives and some solutions. And really, as it's come down at the end of the day, as you can see, where we were able to, call it, manufacture additional plastic or find other things in the COVID piece, we haven't been able to manufacture semiconductor chips. And we're at the beck and call of the global supply chain here where everybody has been tugging on it.

So as we've gotten into -- so yes, clearly, it didn't impact last quarter at all. It's technically not even hurting us in the very moment right now, but it's as we go forth. And then there's 2 pieces of it, right? One is we could sell a lot more of the chips that we will have on allocation into new gantries. But we want to make sure that we keep every gantry that's out there up and running.

So we're keeping a good chunk of the chips that will be coming for ongoing service. And if we were just trying to maximize short-term revenue, the hit wouldn't be nearly as big. But we want to make sure we're taking care of the service side.

So definitely an annoyance, it's one. And to your point, it's a fairly big number that we want to call out right now in the midst of an overall thing. I think it does underscore how far we've come as a company, right? You think about that kind of a hit 8 years ago would have been a big deal, even 3 or 4 years ago would have been a very sizable knockdown punch. And now it's kind of annoying little body blow that we know we'll work right through and set ourselves up to continue to win.

We'll now take the next question from the line of Patrick Donnelly with Citi.

Steve, you touched a little bit on kind of the Panther outlook beyond COVID and certainly the question we get most as well. Kind of stretching beyond that, is utilization going to be the right number to look at anymore beyond this? I mean how are you framing the right way to look at this business beyond COVID? Because again, obviously, the installed base is far bigger. I think everyone tries to put a utilization number on it. How do you frame that view kind of setting it up and looking at that business beyond COVID or at least when COVID is endemic, let's say?

Well, we kind of think about it in a real simplistic terms, Patrick, which is our total revenue that comes from it. And so to that point, right, we're going to have over 3,000 Panthers. Clearly, the pure dollar volume will likely come down from what it was pre-pandemic on a global basis in the near term because we placed a whole bunch more internationally where we don't have quite as much revenue per Panther. And we've also gone to some smaller customers where it will clearly pay off over time.

So the way we think about it -- I mean, ultimately, it comes down to a number of Panthers times the amount of revenue generated per Panther. And we see enormous upside to where that's going to go here over time. So many of the folks have bought Panthers in the last year plus or where we've installed Panthers, they keep wanting -- they keep getting ready to put the regular assays on. And then COVID spikes yet again, and so it's still out there. So we have so much pent-up volume. All those tours that were generated largely in 2020, 2021 are all still delayed. And it comes down to we just generated 14% growth in this quarter even while COVID was surging. So I think it's hard to exactly model it per se, but it's just going to come down to we're going to be selling a lot more assays on a lot more machines. And that's going to generate clearly accretive growth rates above the company average for a long time.

And just to add maybe a finer point to that even versus Q1 '19, that base molecular business is up over 40%. I mean that's a tremendous growth over the past couple of years.

Sure. No, that's helpful. Hard number to pin down for sure on the pull-through in totally. Karleen, maybe one for you, just on the margin setup. Obviously, you talked a bit about the supply chain stuff. I imagine that's adding to some of the inflationary pressures. Can you just talk through kind of that core margin as we try to back COVID out a bit, how that sets up for the rest of the year? And again, any impact from some of the supply chain noise you're seeing there on Breast?

Yes. Certainly, the supply chain is both the revenue on Breast and some higher costs as well that we mentioned. I think absent the revenue headwind, certainly, that base business operating margins, if we had minimal COVID, are still in that low 30% that we were prior to the pandemic.

So keeping -- we continue to keep an eye on that. And I think, again, some of the strengths that we talked about are continuing to contribute to that base business, it's still healthy on the operating margin line.

We'll now take the next question from the line of Tejas Savant with Morgan Stanley.

Just sort of following up on Patrick's second question there. Karleen, can you just give us your updated views on what is a good sort of blended ASP to use given the U.S. versus OUS mix on the COVID testing side? And to what degree do you expect some of the investments you've made in commercial capabilities and operating leverage as well to cushion the COVID testing margin over time as the mix evolves?

Yes. So from an ASP perspective, certainly, pricing has held pretty nicely here. I think roughly $20 was the overall average in the quarter. I think as we look forward, we do expect that pricing will come down, one, as we renew international contracts, which are a lower ASP as well as in the U.S., when the higher -- when the public health emergency ends and its higher -- lower payments for the testing will probably come down. But still, we have a way to go on that pricing to come down to still have that revenue be accretive to the overall corporate average.

And I think about the overall business and margins. Certainly, our supply chain folks annually have improvement targets that they go after, that some of them even in this year are buffering some of the higher costs that we're seeing. We have network optimization opportunities that we're focused on. And certainly, we've talked about investing internationally intentionally over the past several years that we believe as international continues to grow, we'll have more margin accretion from the international business.

Got it. And one for you, Steve, on the launch of the Panther Trax here in December. Can you sort of quantify the cost savings that some of your high-throughput customers could see from the added automation here? And over time, do you expect this to drive an uptick in Panther sales in new accounts? Or is this more of a convenience for your current high-throughput customers given some of the labor issues everybody is seeing at the moment?

Yes, absolutely. We do think this would be a labor efficiency for our labs. This is something that is a really long lead time to the Trax system, so 18 to 24 months. So we won't have any kind of data on actual cost savings for a couple of years, but this is something that we actually have partnered with our customers on, on the development of how it will work in the lab. And we're excited to officially launch it here.

We'll now take the next question from the line of Brian Weinstein with William Blair.

So I guess let's talk a little bit about geographic performance, that you continue to lean into that? And maybe you can be a little bit more specific about territories and products and kind of run through where you're seeing the strength? I recognize it's kind of across the board, but if there's anything that you would kind of call out there? And then what -- maybe I missed it, but can you talk also about what the U.S. growth rate was? And then I'll have a follow-up after that.

Yes. I think overall, international, obviously, we said is a double-digit grower. And I think we'd said years ago, we expected that international would become probably a double-digit grower for many, many years, and I think we're exactly into that.

A lot of it, candidly, Brian, is really coming out of Western Europe because that's where our biggest footprint is. And it's where we've placed a ton of the Panthers. We're starting to get certainly more of it out of Asia Pac as well. But the bigger chunk is really Western Europe, a little bit of Africa. And I think continue to feel good. And overall, that -- the international growth rate is above the U.S. rate.

Yes. Is there anything on kind of a product side? I mean obviously, Diagnostics is, I'm guessing, driving that. But are any of the other kind of businesses seeing significant acceleration OUS that you'd want to call out there?

I think the magic is it's actually largely across the board. Even our cytology business is actually doing well, particularly in a few key markets in Western Europe. The overall Diagnostics, as we've been placing those Panthers, I think you can go back really over 3 or 4 years now, where the molecular business outside the U.S. has oftentimes been in that 20-ish percent growth rate. And if anything, that's just going to be turbocharged here going forward.

Breast Health has been very solid as well. And even things like the SOMATEX acquisition we did in Breast Health 15 months ago, whatever, a German-based company with some of the markers, has helped put us on the map there. Surgical is picking up a little bit.

So there's no one -- I think the magic of it that makes us feel actually even better is it's not like a one-hit wonder. It's not one country, one geography, one product line, even one franchise that's doing it. It's really a whole bunch of incremental things just inexorably getting stronger. And then that's what gives us more confidence for the future.

We'll now take the next question from the line of Tycho Peterson with JPMorgan.

This is Casey on for Tycho. First one is on Breast Health. So how should we think about Breast Health margins given the shift towards recurring revenue now? You know that 23% of the business is gantries. How has that margin profile changed alongside this mix shift? And I guess in the near term, what sort of impact to margins is embedded in the 2022 numbers with lower gantry sales?

Yes. So I think on the Breast Health business, if we think about operating margins, certainly, the service business is accretive to the operating margins, which is the biggest part of revenue for that division. Then I would say then there's probably equal contribution from gantries in the Interventional from an operating margin perspective.

Certainly, the headwind -- the $200 million headwind is significant to that division. But fortunately, here, we are able to raise our full year guidance based on the performance of the rest of the business and the COVID contribution. So we can well manage this headwind and not have to do things like manage headcount or other things. So preserve our great sales force that we have, our service engineers and still feel good about managing through this headwind.

Got it. That's helpful. And then I was wondering if you can give us some updated test of record metrics on the molecular side? How did those trend versus the last few quarters? And how much of this ex-COVID growth is stemming from existing customers that are just porting more of their menu over to Panther versus new customers?

Yes. So Casey, we think of the test of record as an annual number. So to put it in perspective, prior to the pandemic, our largest year was $20 million. We did about $34 million in 2020 and about $40 million in 2021. And we expect that 2022 will be another number in that $30 million to $40 million range.

We'll now take the next question from Derik De Bruin with BofA.

So actually, I just wanted to follow up on that last question and just -- look, you're placing an enormously impressive number of Panthers at a 100 this quarter. That was certainly more than I thought you would have. Just a little bit color on where your installs are, add-ons to existing customers, greenfields, competitive replacements?

And I guess where is -- if you go back, you look pre-pandemic and you look at the number of labs that were not doing molecular diagnostics, how is that sort of like overall -- that overall market expanded? Just trying to get some -- just an idea on this the continued pace of Panther placements and the market opportunity.

In terms of where they're going, Derik, it's really -- again, it's very broad-based. Some are to existing customers. Some might have 3 and they add a fourth. We've definitely got new customers as well. They're going into hospitals. They're going into small labs. They're going into the big labs. They're going into some -- certainly, some are new customers for us. And therefore, whether it's a competitive win or just an expansion of that lab's business, we're certainly seeing that. And we do think the overall focus on high throughput instruments is going to be a very good thing for us going forward. And we feel like that's where we've got a real winning edge as you've known the Panther well.

Great. And then just one other question. As your sort of like geographic mix shifts, how should we sort of think about the tax rate on the out years? Is there sort of room for improvement? Or is it still up in the air because of all the potential changes to the tax laws that are being contemplated?

Yes. Certainly, it's certainly hard to comment on the future tax rate when there's no real legislation really in place. As you know, the devil's in the details on something like that. But certainly, if the federal headline rate went up, our overall non-GAAP tax rate would go up. But I would tell you that we certainly have an active tax department that is partnering with our operations team to put in efficiency strategies.

We'll now take the next question from the line of Ryan Zimmerman with BTIG.

Karleen, just on the COVID guidance, if I think back to your floor number originally, I think it was around $200 million. We kind of assumed about $50 million a quarter. Now you guys are at $1 billion. You did $500 million and change this quarter. The pacing of that number, is it fair to assume given the line of sight you have that $300 million to $400 million could be done in this upcoming quarter? And we should think $50 million and $50 million in the back half of the year? Or are you thinking about the pacing of those COVID sales a little differently than what I laid out?

Yes, Ryan. So as I said in my prepared remarks, we are assuming about a minimum of $400 million here in the second quarter. So that would lead to your math of probably $50 million and $50 million in the Q3 and Q4.

I must have missed that. Thanks for it. A little dense this evening. And then Steve, just on Breast. You guys have moved downstream and you're in much more surgery now than you were before. Obviously, Mammography was kind of your beachhead. When you think about the surgical options and where you could go beyond your existing procedure categories, is there room to go deeper? Is there room to go broader in Surgery and Breast? I'm curious kind of how you think about how rounded of a portfolio you have today relative to where you want to take that.

Yes. We're looking both ways, actually, as we think about it, whether we -- obviously, we've done smaller build-ons in terms of the markers and Faxitron, Focal kind of the breast conserving surgery stuff. I think we see various different ways we can go and are really assessing what else we can be doing across the broad continuum of care and particularly on the treatment side of Breast. So more of that would be potential inorganic, some of it's organic and we continue to look at things that way.

We have time for one more question, Ron.

We'll take the next question from the line of Puneet Souda with SVB Leerink.

Steve, so maybe just one for me. Obviously, great cash flow position that you have and existing cash position as well. So just a frequent question in these times happens to be around valuation and what appears to be somewhat of a disconnect between sort of the buyers and the sellers given the sudden pullback in the public markets. So it seems like expectations haven't normalized, so to speak, in the public markets. But wondering if you're seeing anything different in the private markets? Or if you're seeing just overall broadly this disconnect to sort of normalize? And how do you look at the sort of the current timing and the valuations out there?

Yes, it's a great question. I think certainly, when valuation is correct, you always have the sellers kind of remembering the good old days that might have been. And I think right now, we feel we're in a great position. There's a lot of stuff that -- we had every banker and we had a bunch of both privates and companies that went public last year in our face that wanted us to buy them then. And we said to a lot of them, yes, why don't you go ahead and go public, and we'll keep our eyes on you and look at you later?

So I think a lot of the corrections may create opportunities for us at the right time. They've got to settle in themselves. And candidly, when you have a really successful business, which we have right now, there's no urgency. So I think we're in that magical spot where our core businesses are so strong and growing that we don't need to do anything. Meanwhile, we keep racking up cash that puts us in a great position when we do want to act. And we think whether it's this year, whether it's next year, opportunities will present themselves that we'll be able to take advantage of. But absolutely no urgency from our standpoint while people readjust to what might be the true realities, not what they want to believe the realities could be.

And that's all the time we have for questions. This now concludes Hologic's First Quarter Fiscal 2022 Earnings Conference Call. Have a good evening.