Hologic, Inc. (NASDAQ:HOLX) Q1 2023 Earnings Conference Call February 1, 2023 4:30 PM ET
Ryan Simon - VP, IR
Stephen MacMillan - Chairman, President and CEO
Karleen Oberton - CFO
Conference Call Participants
Patrick Donnelly - Citi
Jack Meehan - Nephron Research
Max Masucci - Cowen & Company
Puneet Souda - SVB Securities
Vijay Kumar - Evercore ISI
Tim Daley - Wells Fargo
Tejas Savant - Morgan Stanley
Derik de Bruin - Bank of America
Dustin Scaringe - William Blair
Navann Ty - BNP Paribas Exane
Good afternoon, and welcome to Hologic's First Quarter Fiscal 2023 Earnings Conference Call. My name is Justin, and I am your operator for today's call. Today's conference is being recorded. All lines have been placed on mute.
I would now like introduce Ryan Simon, Vice President, Investor Relations to begin the call.
Thank you, Justin. Good afternoon and thank you for joining Hologic's first quarter fiscal 2023 earnings call.
With me today are Steve McMillan, 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. We will also post our prepared remarks to our website shortly after we deliver them, as well as an updated corporate presentation. And a replay of this call will be available for the next 30 days.
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.
During this call, we will discuss certain non-GAAP financial measures. A reconciliation to GAAP can be found in our earnings release. 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 sales from discontinued product in Diagnostics. Finally, any percentage change 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're pleased to discuss our financial results for the first quarter of fiscal 2023. Our results highlight the strength of our three divisions, the power of our commercial channels and the increasing impact of our transformative growth drivers from R&D and acquisitions.
For the quarter, total revenue was $1.07 billion and non-GAAP earnings per share was $1.07, both above the high end of our guidance. We also repurchased 1.5 million shares of our stock for $100 million in the quarter. To recap our pre-release, while we did have the benefit of three extra selling days, our top line performance was strong. Diagnostics grew 15.8%, powered by molecular diagnostics, which grew 24.5%. Both figures are organic and exclude COVID.
Surgical also delivered an impressive quarter, growing 14.7% organically. And Breast Health finished the quarter down only 5.2%, a signal that our recovery from chip-related supply chain headwinds is indeed underway. While the extra days contributed approximately 250 basis points of growth net, even without the extra days, Diagnostics and Surgical both grew double digits and Breast Health exceeded prior guidance.
All in, we are well positioned to achieve our full year guidance of low double-digit organic growth ex-COVID in all three of our franchises, well above our 5% to 7% long-term growth rate. Our balance sheet and cash flow are exceptionally strong and we continue to create value for our stakeholders.
Today, we'd like to cover two main topics. First, we'll build on the thesis from our JPMorgan presentation three weeks ago, a theme that encapsulates how we improve women's health globally, drive our commercial success and elevate Hologic's reputation at the same time. Second, we'll highlight the transformation of our business and showcase the growth we are driving in each division, which we hope is now becoming much more evident in recent quarters. We are incredibly excited about today and confident about our future.
Jumping right in, purpose driven, results driven. These four words comprise the theme of our JPMorgan presentation this year and these four words underpin the success of our entire business. At Hologic, we have an unparalleled commitment to women's health. When we speak purpose driven, results driven, nothing symbolizes these words better than our virtuous circle, which we feature in our corporate presentation. It is simple and powerful at the same time.
Most importantly, it unifies and inspires our thousands of employees around the world and points our talented workforce in one singular direction, to elevate women's health, where we have leadership positions in each segment in which we operate. Our business starts with innovative, clinically differentiated, life changing, lifesaving technologies. Whether through R&D or by M&A, it all starts with innovation. As we bring these new innovative products to market, they grow our sales and profits.
And here is the key to our success. What we believe sets us apart and allows us to thrive, we then invest these profits into championing women's health on a global scale. We are expanding policy and access, which then allows our products to reach more women and have an even greater impact on the world. And as our business grows, this cycle continues, simple and powerful.
Two weeks ago for the second straight year, we had the opportunity to engage with global leaders at the World Economic Forum in Davos, Switzerland. This is an incredible platform that was not available to us just three years ago. We've earned our access through our leadership in women's health, our pioneering Hologic Global Women's Health Index and our outstanding response to COVID that continues today.
As we've grown our business, we have significantly elevated the Hologic brand around the world. With our engagement at Davos, making powerful connections and building strong relationships, combined with recognition from our global partnership with the Women's Tennis Association.
Hologic and what we stand for is more recognized globally than ever before, which in turn helps us attract the best and the brightest to the Hologic team, an important advantage in today's labor market. Quite frankly, the best thing we can do for the world and also for our business is to raise awareness and opportunities for women's health globally.
For a sense of scale, there are approximately 170 million women in the U.S., our largest market. This is only a fraction of the nearly 4 billion women in the world. We have a long way to go. And as the importance of women's health is elevated and these markets grow, Hologic will be there at each step along the way.
Shifting gears to our second topic, understanding the growth that is driving our business. With our strong performance for the quarter, the number one question we are asked is, how are we growing our top line? To answer this question, we will first reflect on our business transformation, a powerful mix of organic innovation, and strategic tuck-in acquisitions. Second, we will discuss each division and highlight examples of our growth engines and the multitude of market strategies deployed across each division.
Reflecting on our transformation, it really started well before COVID. Three years ago, we were ready to show the world how we had diligently and thoughtfully strengthened our business for growth. Then, the pandemic hit. And when it did, we established three goals. One, take care of our employees, which we have done; two, meet the world's needs for highly accurate molecular diagnostic COVID testing, which we continue today; and three, emerge as a fundamentally stronger company, which is happening now.
Under the cloud of COVID, while successfully deploying Panthers and producing our COVID assays, we strengthened Hologic for the long-term, to a level higher than even we had imagined prior to the pandemic. We achieved this through the combination of innovative internal R&D efforts, plus a series of tuck-in acquisitions. As a result, we've had continuous new product releases that have fundamentally transformed our business and boosted our growth profile. Now as the COVID cloud begins to clear, it is increasingly more evident that we are geared for success, geared for growth and geared to sustained performance over the long-term.
Next, to fully appreciate our growth potential is to understand the transformation and diversification of our portfolio and growth strategies. Across all divisions, we are innovating, acquiring and building new markets, entering underdeveloped markets and penetrating existing segments. All while continuing to defend and even grow share in the markets we lead. Our growth in each division is grounded in strong and durable core products. These resilient core franchises are backed by long established clinical needs and commercial relationships, which provide a rock solid foundation to leverage into our newer growth drivers. We leverage our installed bases and customer relationships to advance our newer products, which we expect to both diversify the portfolio and accelerate growth.
Moving on to the divisions. In Diagnostics, we have leading positions in core women's health product lines, such as STIs, and cervical cancer. Our women's health molecular diagnostics and psychology base drives steady growth and supports positive relationships with top laboratories and key opinion leaders, which opens the door for additional new products.
Today, Diagnostics has grown from primarily a US women's health business to a global diagnostic franchise with many more growth drivers. For example, we now have over 3,250 Panthers worldwide. A number beyond what we had even imagined, along with 19 assays and the Fusion system that enables even further menu expansion. We also have a vastly expanded footprint with three acquisitions: Biotheranostics, Diagenode and Mobidiag that are contributing today and will even more so in the future.
More specifically, driving future growth for Diagnostics means leveraging our expanded Panther installed base. These customers are adopters of our newer assays, including BV/CV/TV, and M.gen. We add menu, promote guidelines and drive adoption through our women's health clinical channel. Likewise, we also leverage our Panther installed base to enter established categories such as virology, and respiratory testing.
Focusing on our Diagnostics acquisitions, with Biotheranostics we are already seeing solid contributions as we build a new market that is currently minimally penetrated. And with Mobidiag, the Mobidiag platform allows for significant future contributions as we prepare to enter the large and emerging syndromic panel market that is adjacent to our core molecular diagnostics franchise.
In Breast Health, revenue from our 3D Mammography equipment and related service represents the core revenue foundation of the division. While our fiscal 2023 growth is primarily driven by the return of chip supply and gantry availability. The division is primed for future growth via a further portfolio expansion. The Breast Health business now spans the Breast Continuum of Care with more recurring growth drivers than ever before. We have expanded from what was once a capital intensive business by growing service revenue and adding more recurring disposable revenue. In doing so, we are creating new markets as with our Brevera breast biopsy system, while also entering existing markets where we compete with clinically differentiated products. And while we are leaders in the screening space, our R&D teams are poised to keep us ahead of the pack.
In surgical, the business has changed dramatically, evolving from essentially a two product division, to one which is now much more robust and diverse. Last quarter, revenue outside of NovaSure and core MyoSure represented approximately 25% of the division's total compared to only approximately 10% in fiscal 2019. While NovaSure and core MyoSure still formed a strong durable base of the division, the business is far more dynamic than pre-pandemic. We now have meaningful growth drivers outside of these two core product lines from acquisitions, new in-house products and also improvements to existing products.
Going a level deeper, the growth in surgical is driven by products like Fluent as well as NovaSure V5, both from our internal R&D efforts. With Fluent, we created an elegant solution to hysteroscopic fluid management that stands alone. And with our NovaSure V5 line extension, we have proven that even the best can get better and that we are never satisfied and never done innovating.
By acquisition, the assessor procedure and the bolder advanced vessel sealing portfolio also diversify and elevate the division's growth trajectory. These are both laparoscopic tools that we've moved swiftly to acquire during COVID times and have added to our prior hysteroscopic only offering. Acessa is a unique radio frequency fibroid removal solution where we are building a new market and improving payer coverage. In Boulder, we are entering an underdeveloped market by deploying our large surgical sales force to introduce our advanced sealing portfolio to the OB/GYN market.
Finally, our international business is so much stronger and poised for exceptional future growth post pandemic. Bolstering the individual product growth drivers in each division, we continue to penetrate our markets internationally. For example, in the quarter our Diagnostics business ex-COVID and surgical businesses each grew more than 20%. As we've stated before, we expect international growth rates to be accretive to our overall growth rate for years to come.
In summary, our commitment to our purpose has paved the way for our success during the pandemic and is a beacon for our future. We are now a transformed, much stronger Hologic with more diverse growth drivers across each business and a much larger, more capable international presence. And through our innovative R&D and effective tuck in acquisition strategy, we are well positioned to continue to drive strong sustainable growth for years to come.
With that, let me turn the call over to Karleen.
Thank you, Steve, and good afternoon everyone. We are pleased to share first quarter results that exceeded our guidance on both the top line and bottom line. Our strong performance was once again driven by our diagnostics and surgical businesses with each growing mid-teens organically in the period, excluding COVID-19 revenue. And in Breast Health, we are encouraged by results that show the chip supplies moving in the right direction and that our mammography business is recovering.
Before moving into our divisional results, it is important to highlight our balance sheet. Our leverage ratio of 0.2 times shows the capital structure that is strong as it has ever been, providing our business a tremendous amount of flexibility for internal investment and capital deployment opportunities.
Moving on, I will now provide more color on our financial results. In the first quarter, revenue and profitability once again meaningfully surpassed our estimates, with the balance sheet split between our base business and COVID. Total revenue came in at $1.074 billion, a result more than $100 million higher than the midpoint of our guidance. And non GAAP EPS was $1.07, more than $0.20 higher than the midpoint of our prior guide.
Turning to our business results. In Diagnostics, total revenue of $559.3 million declined 41.2% compared to the prior year. It is important to remember that COVID testing revenue was elevated in our fiscal first quarter of 2022 given the surge in infections from the Omicron variant. Thus, a more accurate representation of the diagnostics business is to exclude COVID assay revenue, related ancillaries and a small amount of revenue from discontinued products. When making this normalization, we see that organic diagnostics revenue increased 15.8% in the quarter.
Within Diagnostics, we continue to see momentum in molecular. For the third quarter in a row, we delivered healthy double digit growth. Specifically, molecular diagnostics grew nearly 25% in our first quarter excluding the impact of COVID. This outstanding result demonstrates strong utilization across our significantly larger Panther installed base. Performance was driven by a mix of our legacy portfolio and newer assays. For example, the collective revenue of our core STI menu was well above pre pandemic levels in the quarter.
In addition, BV/CV/TV had another strong quarter, more than doubling compared to the prior year as our progress continues growing the IVD vaginitis market. Further, our non COVID respiratory portfolio delivered revenue ahead of expectations in the period. As we saw uptake and testing for flu and RSV given heightened prevalence in public awareness of these pathogens. Finally, the Biotheranostics contribution to our base molecular performance continues to increase with accretive revenue growth in the quarter.
Moving to our COVID results, we generated $127 million of COVID assay revenue in the quarter, exceeding our previous guidance of $75 million. In terms of the COVID assay revenue split by geography, domestic sales led most of our upside and represented nearly 80% of COVID assay revenue in the period. The demand for our COVID assay remains primarily COVID only. However, we did see above trend demand for our COVID flu multiplex test.
Rounding out Diagnostics, our Cytology and Perinatal businesses increased 1.6% compared to the prior year. In Brest Health, total revenue of $334.2 million was down 5.2%, better than expected. These results were driven by strong demand for our Mammography equipment and improving semiconductor chip supply. We remain cautiously optimistic that Q1 revenue performance in our breast imaging segment being down only 4.5% highlights that the worst of the chip supply headwinds are likely behind us. We would remind everyone, we are still on allocation and that the macro backdrop could change quickly.
As it relates to our interventional business, revenue was down 8% in the period, driven by lingering supply chain issues outside of chip availability. We expect these headwinds to subside for the balance of the year and the segment to resume a cadence of strong growth starting in fiscal Q2.
In surgical, first quarter revenue of $154.1 million grew more than 17%. And excluding the Boulder acquisition, the business grew nearly 15%. These results underscore a more diverse surgical business with more growth drivers than in the past. In addition to strong performance from MyoSure and better than expected results from NovaSure, the quarter showcased increasing contributions from Fluent and our laparoscopic portfolio of Asessa and Boulder. Lastly, in our Skeletal business, revenue of $26.6 million increased slightly, less than 1% compared to the prior year period.
Now let's move on to the rest of the non GAAP P&L for the first quarter. Gross margin of 62.7% was driven by higher than expected COVID-19 testing revenues and strong performance in our base business in the period. Total operating expenses of $339.4 million in the first quarter increased 1.6%, but were up less than 1% when excluding expenses from Boulder, which closed at the end of November 2021. The increase was led by higher marketing spend given the timing of certain initiatives. We expect marketing expense to move lower starting in our fiscal second quarter of 2023. Below operating income other expense was less than anticipated primarily due to higher interest income from investing our elevated cash balances at higher interest rates. Finally, our tax rate in Q1 was 19% as expected.
Putting these pieces together, operating margin for Q1 came in at 31.1% and net margin was 24.9%, both ahead of our previous estimates. Non GAAP net income finished at $267.9 million and non GAAP EPS was $1.07.
Moving on from the P&L. Cash flow from operations was $253.4 million in the first quarter. We had $2.4 billion of cash on our balance sheet and our leverage ratio remained at 0.2 times. Although it may appear to the outside our eye that we are letting our cash balance build, rest assured, our M&A teams in each division are incredibly active. Our capital allocation strategy remains unchanged. Our first priority remains pursuing growth accretive tuck in deals that align with our divisions and leverage our core strengths and strong commercial channels.
More recently, given the stability of our balance sheet and the strength of our business, we have widened our aperture to consider slightly larger EBITDA of generating deals. That said, it is important to make clear that we expect any transaction we pursue will be complementary to our core strengths and not represent a completely new or unrelated vertical. Our second priority will continue to be share repurchases. And as Steve highlighted, in the first quarter we repurchased 1.5 million shares for $100 million.
Now let's move on to our updated non GAAP financial guidance for the second quarter and full year fiscal 2023. As a reminder, our organic guidance excludes acquisition revenue until each deal annualizes. Therefore, all deals are part of our organic base starting in Q2, 2023. In the second quarter of fiscal 2023, we again expect strong financial results with total revenue in the range of $930 million to $980 million. For all of fiscal 2023, we are increasing our full year guidance and expect total revenue in the range of $3.85 billion to $4 billion, reflecting low double digit organic growth ex-COVID across each of our divisions.
To help with constant currency modeling, we are assuming foreign currency exchange headwinds of slightly less than $20 million in the second quarter of 2023 and approximately $50 million for the full year. These headwinds have improved compared to our previous guidance as the U.S. dollar has depreciated over the past several months.
Turning to our divisions, we are thrilled with the outlook for each business as we continue to anticipate that core diagnostics excluding COVID, Breast Health and Surgical will organically grow low double digits for our fiscal 2023. In diagnostics, molecular should continue to lead the way. We expect our assays to drive growth as non COVID utilization improves and customers add additional menu to their Panther system.
As a reminder, our molecular diagnostic growth is not predicated on placing more Panther instruments, but rather helping our existing customers grow their business. As we have said consistently, even though Panther placements are likely to slow in the near term, given the huge pull forward during the pandemic, additional placements do not influence the trajectory of our molecular outlook. Closing out on diagnostics, we expect blood revenue of slightly less than $25 million for the year.
Moving to Breast Health, we see an improving environment for chip supply and our position is unchanged from last quarter. Our expectation is that for a gradual improvement in our breast imaging business throughout 2023. We maintain our view that the business should exit fiscal 2023 at or near normal level. However, we'd like to make clear that you should not expect an outsized revenue catch up in any particular quarter. Instead, our plan is to incrementally work down our backlog over time as we look to efficiently manage the resources of our outstanding field service team.
Finally in surgical, as evidenced by our first quarter's results, the business has quietly transformed into a dynamic franchise, moving beyond what was once a two product division. Low double digit organic growth for fiscal 2023 will be driven by a combination of MyoSure, the related FluentFluid Management System and our laparoscopic portfolio of Acessa and Boulder.
In terms of COVID sales, we expect COVID assay sales to be approximately $50 million in the second quarter of 2023 and $225 million for the full year. COVID related items inclusive of a small amount of discontinued product revenue are expected to be approximately $35 million in the second quarter and $130 million for the full year.
Moving down the P&L. For the full year, we continue to expect our non GAAP gross margin percentage to be in the low 60s and our non GAAP operating margin percentage to be approximately 30%. Within this operating margin profile, we have again incorporated elevated inflationary pressures into our guidance of approximately 200 basis points to 250 basis points, which we anticipate will persist throughout our fiscal 2023.
In terms of operating expenses, we expect spending to step down starting in our second quarter, given the timing of marketing expenses primarily associated with our WTA partnership. Further, we foresee operating expense dollars as fairly flat sequentially from Q2 through Q4. Below operating income, we expect other income net to be an expense of around $50 million for the rest of the year. Our guidance is based on an annual effective tax rate of approximately 19% and diluted shares outstanding are expected to be approximately $25 million for the full year. All this nets out to expected non GAAP EPS of $0.80 to $0.90 in the second quarter and $3.55 to $3.85 for the year.
To conclude, let me wrap up by repeating that our strong first quarter results exceeded our guidance despite a persistent macro uncertain. Performance was driven by tremendous growth in our molecular diagnostics and surgical businesses. Combined with a better than expected progress in Breast Health. As we look forward to the remainder of our fiscal 2023, we are excited to showcase our transformed business. With our updated guidance reinforcing our expectations of low double digit growth in each division for the remainder of the year. Hologic is a much stronger company than prior to the pandemic and we believe our 2023 performance will further prove this out.
With that, we ask the operator to open the call for questions.
Thank you. [Operator Instructions] And our first question will come from Patrick Donnelly with Citi.
Hey, guys. Thank you for taking the questions. Karleen, maybe just picking up on the margin side there, obviously, pretty good performance in the quarter. Still talking about, obviously, some of the headwinds throughout the year. Can you just talk about the cadence? I know previously you were talking kind of 30% -ish every quarter. Can you just walk us through, I guess, obviously, the tailwinds we saw in 1Q and what the rest of the year looks like in terms of headwinds versus tailwinds and how that cadence works?
Yes, sure. So I think the outlook would say that each quarter is roughly 30% operating margin and what you see happening is, you have the marketing expenses coming down from Q1. You have lower COVID revenue, which is a headwind, but then you have higher Breast Health revenue, which is a tailwind. So they kind of offset those headwinds or the tailwinds offset over the course of the year. And we maintain at that 30%, again, a little lower than pre-pandemic, because we have the higher inflationary costs still anticipated.
Okay. It's understood. And then Steve, maybe just on molecular diagnostics, really strong core performance there. Can you just flush out a little bit more on the drivers you saw? I guess, sustainability, again, obviously, some pretty big numbers you guys have put up there. Just trying to get a sense for the drivers and what we could expect going forward on that front?
Yes. You probably got it in multiple buckets, Patrick. Part is just a return of the Panther is being used for the core STI, most of our women's health business. You've got increasing growth in our new product launches, especially BV/CV, which is off to a tremendous start and we said we think will be a major driver of growth. And you really have -- what we kept saying over the last couple of years and it wasn't as obvious is so many of our customers around the world that we're running COVID are now putting the menu onto the Panthers. And it's really that simple and a huge part of it. And there's just a little bit of Africa and some viral stuff. But...
Yes. The only thing I would add to that, Patrick, because we had some nice contribution from our respiratory assays, which will be seasonal as we move forward.
And our next question will come from Jack Meehan with Nephron Research.
Thank you. Hi. You're going to get the formalities out of the way, go birds. It feels like [indiscernible], but I say that every year.
Fly Eagle fly, fly Hologic fly. Okay, go ahead, Jack.
Excellent. So I had a couple of 10-Q derived questions that I personally thought were kind of interesting and I want to get your thoughts on. The first is, so you report international molecular sales of $97 million. Karleen, based on your COVID assay disclosures, I think it's like $25 million of international COVID. So it implies about $72 million of base molecular international. Prior to the pandemic, it was like $30 million a quarter. So I was just wondering like could this be an interesting gauge of what the international installed base could look like in terms of the stickiness of Panther? Just any thoughts on that would be helpful.
Yes. So we have, as you said, that number includes the COVID assay revenues. So I think you've attempted to take some of that up. We also have the ancillaries, which are part of that, that are elevated because of COVID. But I think certainly, we're seeing the uptake, again, with newer customers in more than COVID. As well as our initiatives like in Africa, what Steve talked about the viral picking up some nice traction there as well. I think we -- as we think about international molecular, we would think that that is going to grow a little faster than U.S. given the commercial investments that we've made there and the Panther placements.
Yes, Jack, just to interpolate on that point that you've noticed. We placed a lot of Panthers with so many, especially in the European countries as we responded with COVID and every one of those was coming with trailing shift over to the STI business. So I think that's a big piece of it.
Interesting. Okay. Then my second question is on breast imaging. So the U.S. sales in the quarter were $212 million. I think that's actually like the largest first quarter you've had, at least several years. International still seeing some pressure, but I'm just trying to juxtapose this versus your comment about you're still seeing ongoing semiconductor pressure. What was going on in the U.S. in the quarter? Was there any flush of some sort as chips came in and just what does 2Q assume?
Yes, there was absolutely no flush we can tell you. We did get a little bit more supply that we we’re able to install. And candidly, Jack, we had the extra week. We got a little bit of service revenue in there, because of that extra week in the quarter. So that kind of pushed us into the growth without that extra week that would have been slightly down a bit. But we like where we're coming and we were able to kind of refurb a few more chips, got a few more chips in and we're able to get a little more product out, but we're feeling really good about where we're headed this quarter and for the rest of the year in Breast Health.
And our next question will come from Max Masucci with Cowen & Company.
Great. Thanks for taking the question. First one on operating margins. So it looks like the COVID testing and related items were about 15% of the organic revenues. So just based on your expectations for global COVID testing revenues this year and as we near the end of the U.S. government's DAG program, does COVID testing and reimbursement remain the big needle mover for 2023 operating margins? Or is the operating margin expansion opportunity now more dependent on the Breast Health rebounds and/or continued strength in non COVID molecular DX?
Yes, I would say that the margin accretion from COVID is less and less dependent on COVID as we move throughout the year and it's going to be more driven by the Breast Health recovery and certainly Q1 to Q2 lower operating expenses, which will persist throughout the year.
Okay. Got it. And then just in terms of M&A, I think if you look at your free cash flow deployment, about 28% over the past five years. I think it's been for share buybacks in any sense? I would just be curious to hear about the potential size of any M&A deal you'd be willing to pursue. Any recent conversations amongst the biz dev team in terms of what types of companies fit best with the Hologic of today? And just a general update on capital deployment would be great? Thanks.
Sure, Max. To reiterate what Karleen said, our primary goal is still tuck in acquisitions followed by share buybacks. We certainly have been opportunistic on the buybacks because we generated a whole bunch of more cash during that time and thought that made a lot sense. Going forward, we're looking across the businesses, all being led by the divisions. We're not going to get into particular scale or targets for obvious reasons. But I think what we would say is, we might go a little bit bigger on scale if it brought more EBITDA. So it will be a proportionate thought process there.
But I think we're -- the biggest takeaway frankly is, we're in a position of strength where our base businesses are very strong. We don't have to go do anything. And candidly, when I think there's a lot of folks around trying to figure out what they want to be when they grow up right now. We know exactly where we're going and what we want to be and that is championing women's health and having every business going well. So it gives us the luxury of being patient and smart on the business development front.
And our next question will come from Puneet Souda with SVB Securities.
Yes. Hi, Steve. Thanks for taking the question. So maybe for you, given the low double digit growth rate that you're highlighting here, obviously, the business, all three segments are doing great. So what's holding you back on the long term guide of 5% to 7%? Why couldn't that be higher now in your long term outlook?
Because we're running the business for the long term. And fundamentally, let's look at it. We're still bouncing off of some comps from last year where things were a little depressed from COVID everything else. We are a company that delivers and plans for the long haul and everything we've done to move up to the 5% to 7% has been very smart and we're going to continue to be prudent.
Okay, great. And then just on capital deployment, maybe Karleen. What's your ability to lever up? What ratio are you comfortable with, just given the sort of the interest rates that are there right now and potential for those to continue to ramp up a bit higher?
Yes. I mean, I think we have indicated that we'd be comfortable in a 2 times to 3 times leverage ratio that's something we talked to and supported by our credit agency. But to your point, we would continue to evaluate based on interest rate environment. But certainly, at this point we have plenty of cash and we have a credit line that we can fully deploy. So we feel like we've got good flexibility to do what we want in that event.
And moving on to Vijay Kumar with Evercore ISI.
Hey, guys. Congratulations on a solid Q here, and thanks for taking my question. Steve, I wanted to ask one on this guidance update here. It looks like you beat the quarter versus your midpoint of your prior guidance by about $120 million, the annual guide was raised by about $125 million. It looks like most of that's coming from FX and change in code assumptions. When I look at Q1 print here, your underlying organic came in better. So why wouldn't some of that underlying strength we saw in Q1 flow through -- flows through the rest of the year? Is there any kinding impact of revenue recognition or is this just a conservatism?
It's -- we continue to deliver, I can promise you, it has nothing to do with timing of revenue recognition, Vijay. The underlying business is very strong, we’re one quarter in. Think about where we were a year ago at this time. Suddenly Russia invaded Ukraine, nobody saw that coming. I've lived through the downturn of 2008-2009. We've watched the world go up and down and over the first quarter of the year. So we're going to continue to be very prudent, do not underestimate our confidence in our ability to run the business.
Understood. And then maybe another way to ask this question Steve is Diagnostic. Clearly it was a highlight, 16% and organic. So what is driving this? Is this like reagents? What kind of testing is driving this? Or was this easy code comp? When I look at Q1, overall underlying organic was 6%, they hit double digits for the year, the base has to do clean stroke at the back half. How should we think about this diagnostic which was 15% in Q1 ramping up in back half or is the back half being carried by normalization of breast imaging revenues?
Look, clearly the comps on molecular and diagnostics will get harder in the back half. But fundamentally, what's driving it, we sort of answered this I think earlier. We placed a whole bunch of Panthers, almost 1,500 Panthers in COVID time over the last three years. We've got more customers adopting our core menu. We have our new products being launched doing very well. And those are really the main drivers, as well as a little bit of flu and a little bit of viral stuff as we've been penetrating a little more Africa.
Yes. I mean, I think it is the Panther placements and new customers as well. I think we've talked about in our corporate presentation that of newly acquired customers, 85% are running at least one other assay and over 55% are running at least two other assays. So I think that is the value of the Panther in the menu that we have driving that growth.
And our next question will come from Tim Daley with Wells Fargo.
Great. So Steve, I love the comments on some parties out there trying to figure out who they want to be when they grow up. And just running with that, we've seen a lot of players in molecular diagnostics seem to be adding menu in women's health arena. So given your legacy foothold there, how can you think about the current competitive environment? Are you worried about any price pressures, maybe from new entrants trying to gain share via that lever? Yes, just kind of the sensible stance here and kind of what you would answer as to any questions around that?
Yes, we worry all the time. But at the end of the day, we've also built an incredible sales force that has partnered both with the labs, but also with the clinicians. And our assays have proven themselves over time as well as do not underestimate the workflow advantages of our Panther system. And so, there's a lot of people that can talk a good game and especially let's face it. There were so many startups that all were working on stuff and then they got money in COVID time and they start talking about all their women's health assays. And it's an interesting little landscape right now. So we never take anybody for granted. We face some very formidable competitors, but we always have and we will continue to and we frankly think we continue to innovate things like BB/CV. We continue to bring new assays and new tests and new education to our customers. And that continues to provide strength for us.
All right. And I appreciate that. And then one for Karleen. So Surgical, great to hear about the performance outside of the legacy products and appreciate the detail on the growth drivers this year. But could you kind of give us a bit more quantified detail about growth ranges here across the various buckets, so kind of the legacy products versus the new in house developed versus kind of the recent acquisitions, any additional kind of above below ranges or anything like that you could provide? And thank you.
Yes. What I would say is dollar contribution is probably evenly split between the legacy platform and affluent our new innovative and then the acquisitions. But certainly, the percentage growth rate is much higher than the acquisitions building off a smaller base. But at the end of the day, I think the key takeaway is, there's not just one growth driver, there's multiple growth drivers that are driving the success of that business.
And our next question will come from Tejas Savant with Morgan Stanley.
Hey, guys. Good evening and thanks for the time here. Maybe I'll start with a couple on some of the recent deals for you, Steve. On Mobidiag, can you just remind us again where things stand in terms of -- I think you had said there's an entry buildup underway ahead of the launch. How big do you think the revenue opportunity could be in fiscal 2023? And then similarly, you highlighted Biotheranostics a couple of times today and obviously, they've got into guidelines. They have the recent data from December as well. How big do you see this opportunity becoming for you, perhaps not this year, but a couple of years out?
Sure. I think on Mobi, Mobi will still be pretty small this year. Mobi will hit its stride ultimately when bring it to the U.S. which is still several years away. But we love the platform we have there. On Biotheranostics, it's still very small penetration. So the reality is, clearly, it's going to be probably potentially a few hundred million, we're not sure at this point, never great at. When you're creating new markets, it's always really hard because when you go back eight years ago, people ask me, could MyoSure someday be the size of NovaSure. And at that point in time, it was hard to picture that. And today, MyoSure is way bigger than NovaSure.
So I think this magic that we have where we really are creating and building markets, it's sometimes hard to fully put a number on it other than to see, we think there's a lot of runway here, a lot.
Got it. That's helpful. And then a couple of follow-ups here. One on, just the hospital CapEx environment and any sort of change in either sort of decision timelines or perhaps cancellation rates here a month into the new calendar year? And China, I know it's small for you guys. I think it's less than 3% of sales. But is there anything going on there in terms of the COVID case surge that we should be factoring in at least in the fiscal second quarter here?
I think on the -- first on CapEx, we continue to stay really close to our sales teams on it. And seeing very tiny, nothing outside of historical cancellation rates, which is de minimis. On China, I think what you will see is, probably most of the hospitals in China over the last 60-ish days and probably here for a little period four are probably cutting down on normal procedures as they've been treating the COVID patients. But I think for our business, again, pretty small, but I think that's the kind of macro way I'd be thinking about China right now. And my hunch is, after the Chinese New Year and everything else, they're going to largely come back online and that will start to pick back up probably later this actual calendar quarter. I think they're going to get through it fine.
And moving on to Derik de Bruin with Bank of America.
Derik de Bruin
Hi, good afternoon.
Derik de Bruin
Hey. A question, you're talking about 30-ish percent adjusted operating margin for this year. I'm looking at the consensus for 2024, it's about 30.5%. You're talking about 200 basis point to 250 basis points of inflationary pressures that are sort of in there. So like can you walk us through how you're thinking about operating margins as you sort of invest in the business and some of these inflationary pressures normalize, just sort of trying to get a sense of where we go from here?
Yes, Derek, it's Karleen. So I'll take this one. So if you think about prior to the pandemic, what I would say is, our normal operating margin was roughly 30%, 31.5%, very rich margins for our industry. I see us probably over time getting back to that level. But what I would say is, think about our 5% to 7% top line long term growth rate. We will grow EPS faster than that, so likely low double digits and that EPS growth comes from more than just operating margin expansion. It comes from higher revenue growth, as well as some things that we can do below the line. So that's how we think about our long term outlook for earnings growing faster than revenue and again anchored on that 5% to 7%.
And Derek, I’ll put a little point on it too. I've been around this business long enough to watch either divisions or big companies or companies themselves trying to push that operating margin so far that they cut into R&D and you don't see it immediately, but over time your innovation falls. And so, we know a lot of folks want to just keep saying all -- every number go up like that. We're thinking very much as Karleen said about driving the EPS number, but continuing to invest in R&D and not try to drive the operating margin as high as humanly possible.
Derik de Bruin
Well, thanks for setting me up Steve. That's exactly where I was going next. So I appreciate that. When you think -- you've got Biotheranostics, which is your entry in sort of like the oncology world. I mean there were some dabbling in the past with some things with like -- I think with PCA3 or some of this like stuff. How do you sort of think about oncology market? I mean there's obviously a lot of real estate out there, but I think pointed out that you don't want to do anything that's super dilutive in those areas. Can you just sort of -- but clearly there's a lot that's going on that market and opportunities for Hologic. Can you sort of like flesh out where you sort of think your genomics focus is, where this is going, how it is? Thanks.
Sure, Derik. You're probably the only person who remembers PCA3. So I think we're comfortable continuing to be fairly patient. If I look at this overall, right? So I go back seven or eight years, liquid biopsy, it's going to be the greatest thing ever and everybody thought by 2018, 2020 this massive thing, we kept saying, look, we just don't know that there's going to be a lot of money made. So we continue and particularly in our acquisitions, everything we look at is thinking about what is the long term value creation from an earnings standpoint, not just a revenue and let's face it. As you well know in this industry as well there's a whole bunch of companies that generate a lot of top line, but no bottom line and they get great valuations when they're standalones. You try to drop those into a healthy company and where suddenly the EPS starts to get looked at, you never get that same expansion on the multiple.
So I also think for all of the promise, the promise never comes as quickly as everybody thinks it's going to do. I'm still waiting for gain sharing in orthopedics to take over the full world 20 years later. And I just think as we continue to watch the space, we believe there will be winners that will emerge, but we're still letting some of those play out candidly and try to see it's not just a revenue gain or a number of boxes sold or a number of kits sold or whatever else. It really is, okay, what's our long term trajectory is how we're trying to think about these things? Thank you for asking that.
And we will take a question from Andrew Brackmann with William Blair.
Hey, this is Dustin on the line for Andrew. Going back to a comment you made earlier on Mobidiag and the entry in the roaming testing market. Can you be more specific on the timelines and how you plan to leverage your tampered relationships to drive that forward?
Yes. We're clearly entering in Europe right now on a smaller scale. The U.S. clearance will be ultimately the bigger part. And as we said, that's probably at least a 2025-ish event at this point. So we're still a few years away as we prepare for it. And we'll certainly be able to leverage a lot of the strength that we have in the labs, especially the medium sized labs as we go into that point at that point.
Okay. And I recognize that you talked a lot about M&A already, but I’m wondering if you can be more specific and speak to how you're thinking about valuations both in the public and private space?
We're always looking -- at the end of the day, we're thinking about the long term top and bottom line growth. We're very focused on ROIC, a key part of our senior leadership team comp is tied on ROIC, so we look at it on every deal. And we've watched a whole bunch of things that even if come down 80% or 90% and some of them we still don't necessarily like. So again, I think we've got the luxury of time on our side given the strength of underlying business and the strength of our balance sheet, which gives us the chance to be relatively picky around what might be out there.
And we have a question from Navann Ty with BNP Paribas Exane.
Hi. Thanks for taking my question. On women's health, so I believe vaginitis drove Q1 growth ex-COVID. Should it continue to drive growth for the rest of the year? And longer term, could you discuss your women's health focus being potentially a competitive advantage versus your non focused peers? Thank you.
Yes. I think we continue to see growth certainly in our women's health assays that's been -- and it kind of got me to your second point of view. If you think about something like BB/CV/TV that we've launched, we discovered and realized about that because we're so tapped into to the key opinion leaders and starting to realize that there are other tests that may be able to be developed that we can bring to the market to bring greater levels of certainty and specificity. And I think when we have that knowledge because we surround those customers, our focused approach certainly benefits as well and I think helps us on the innovation side, the same in 3D mammography and how that's led to better biopsy stuff. And then the same in our surgical business where understanding fibroids better than anybody else and being able to innovate endometrial ablation. So we kind of surround these, call them, large niches, but it's really the insights that we have more with the KOLs that I think does provide us a level of competitive advantage. Thank you.
Thanks. And staying at women's health, you mentioned future portfolio expansion in Breast Health. So are you able to tell us more about any Breast Health innovation?
Any Breast Health innovation. I think the way to think about that is, we just continue to innovate. We've always been -- we've brought enhanced detectors, enhanced workflow solutions and enhanced imaging along the way and we'll continue that.
Yes, I think we focus -- one of the important focus on innovation is patient experience, focus on that as well as machine learning, what we can do to make radiologists more efficient and certainly that's a big issue outside the U.S. where there's much fewer radiologists.
Thank you. And this now concludes Hologic’s earnings conference call. Have a good evening.