Hologic Up on Q2 Earnings Beat & Raised Guidance - Analyst Blog

Shares of Hologic Inc. HOLX surged more than 8% to $22.74 after market-close on May 2 since the release of its second-quarter fiscal 2014 results. Adjusted earnings of 37 cents per share increased 7.9% from the year-ago level and beat the Zacks Consensus Estimate by 4 cents. The adjusted number also steered ahead of the company's guidance range of 32−34 cents.

On a reported basis, the company recorded net loss of 6 cents per share, much narrower than a loss of 19 cents per share reported in the prior-year quarter.

Revenues in Detail

Revenues were $625.0 million in the quarter up 2.0% year over year (year-ago revenues included $10.6 million from Lifecodes, which the company sold in March 2013). The top line also exceeded both the Zacks Consensus Estimate of $610 million and the company's guidance range of $605−$615 million.

In the quarter, Hologic's key products, especially 3D mammography and Aptima HPV, gained momentum. In the diagnostics business, the Japanese Red Cross (JRC) selected Hologic's new collaboration partner, Grifols to screen the country's 5.3 million annual blood donations. According to Hologic, this represents a strong win and validation of Hologic's Panther system.

Further, in breast health, strong global sales were encouraging during the quarter. The company also received positive news on the reimbursement front. In early March, the AMA CPT Editorial Panel announced that the application for breast tomosynthesis was accepted for three Category I CPT codes for both screening and diagnostic mammograms.

Although one quarter's performance does not establish a trend, Hologic continues to believe the near-term growth opportunities will potentially offset the ongoing headwinds.

Segments in Detail

The Diagnostic segment (46.5% of total revenue) was down 1.9% year over year on a reported basis and 4.0% year over year on an adjusted basis to $296.5 million in the quarter. The divestiture of the Lifecodes business in March last year accounted primarily for the downside. In addition, interval expansion and globally lower average selling prices ASP led to a decline in ThinPrep pap test sales in the U.S. However, this decline was partially offset by decent performance from the molecular product line with majority of revenues coming from Aptima products sales and blood screening revenues.

Breast Health segment (38.2%) improved 8.5% year over year to $238.7 million. Growth was driven by increasing sales shift to 3D Dimensions systems from 2D Selenia and 2D Dimensions systems; a 9.1% increase in service revenues from the company's increasing installed base of digital mammography systems along with growth in C-View system sales and biopsy device sales growth, specifically the Eviva product line rise in biopsy device sales. However, an overall sales decline of 2D systems as customers continued to shift to 3D, weighed on the growth partially.

The GYN Surgical business (11.5%) recorded revenues of $72.0 million, down 2.2% from the comparable prior-year period. The downfall was on account of lower NovaSure system sales, despite growth in MyoSure system.

Revenues from Skeletal Health (3.8%) moved up 4.7% year over year to $23.5 million. Increase in revenues from new Horizon bone densitometry system was partially offset by lower sales of bone densitometry systems.

Operational Update

Hologic's adjusted gross margin was 61.7% in the reported quarter, up 373 basis points (bps) year over year. The margin expansion was on account of higher-than-expected revenues and a favorable revenue mix from blood screening, domestic 3-D mammography and service.

In the reported quarter, adjusted operating expenses amounted to $190.7 million, down 5.8% year over year. Accordingly, adjusted operating margin was 31.2%, up 627 bps year over year.

Financial Update

Hologic exited the quarter with cash and cash equivalents of $490.4 million compared with $829.4 million at the end of fiscal 2013. Total long-term debt as on Mar 29, 2014 was $4.27 billion, down 11.0% year over year.

Guidance

The company provided its business outlook for third-quarter fiscal 2014 and updated the full year guidance. For the said quarter, the company expects revenues of $615−$625 million (representing decline of 2% to flat salesyear-over-year) resulting in adjusted earnings of 33−34 cents per share. The Zacks Consensus Estimate for revenues and EPS of $621 million and 34 cents respectively, fall within the predicted range.

For the full year, the company increased its expectation to report adjusted revenues of $2,460−$2,490 million (from the previous projection of $2425 million to $2475 million), representing a 1−2% decline over the last year (against 1−3% decline estimated earlier). The current Zacks Consensus Estimate of $2,480 million is in line with the revised guidance. The company also upgraded its adjusted EPS guidance to the range of $1.37−$1.40 from the earlier range of $1.34–$1.38. The Zacks Consensus Estimate of $1.39 falls in line with the new guidance.

Our Take

Hologic's performance in the fiscal second-quarter surpassed expectations on both earnings and revenue front. Although the company is plagued by challenges like decline in revenues from the core segment and ongoing shift to the 3D tomosynthesis technology, management seems strategically prepared to get over these challenges. The major goal of management is to sustain top- and bottom-line organic growth going ahead. The strategy lies in accelerating the performance of the major growth drivers of the company, i.e. Diagnostics, Breast Health and Surgical, and establishing a strong foothold globally. The raised fiscal guidance also reinstills our faith in the company.

Currently, Hologic carries a Zacks Rank #2 (Buy). Some other well-ranked stocks in the medical instruments sector are Accuray Incorporated ARAY, Edwards Lifesciences Corp. EW and IDEXX Laboratories, Inc. IDXX, all carrying a Zacks Rank #2.