Q3 2025 Earnings Call Transcript

Good day, everyone, and welcome to GE Healthcare Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. Now it's my pleasure to turn the call over to the Investor Relations Officer, Carolynne Borders. Please proceed.

Thanks, operator. Good morning, and welcome to GE Healthcare's Third Quarter 2025 Earnings Call. I'm joined by our President and CEO, Peter Arduini; and Vice President and CFO, Jay Saccaro. Our conference call remarks will include both GAAP and non-GAAP financial results.

Reconciliations between GAAP and non-GAAP measures can be found in today's press release and in the presentation slides available on our website. During this call, we'll make forward-looking statements about our performance. These statements are based on how we see things today. As described in our SEC filings, actual results may differ materially due to risks and uncertainties.

With that, I'll hand the call over to Peter.

Thanks, Carolynne. Good morning, and thank you for joining us today. We delivered another quarter of solid results, and we're focused on executing our precision care strategy. In the third quarter, organic revenue grew 4%.

We delivered robust orders growth of 6% with growth across all segments. This reflects solid customer demand for our innovative solutions, a healthy capital equipment environment and our strong commercial execution. We're now entering a new wave of innovation as a result of our increased R&D investments over the past few years. When you couple this with our focus on lean, we expect to accelerate future top and bottom line growth.

Solid backlog demonstrates that our customers are investing in our new products and solutions. For instance, we're seeing robust growth in contrast media and nuclear medicine, where we're uniquely positioned to deliver end-to-end solutions for our customers. Our synergistic portfolio of diagnostic imaging equipment, radiopharmaceuticals, AI cloud and software help drive efficiencies for our customers and creates a competitive advantage for the company. Looking at commercial execution.

We continue to see momentum across our business as we secured multiple large system deals in the quarter, totaling nearly $0.5 billion in future revenue. Earlier this month, we announced a 14-year Care Alliance with UC San Diego Health focused on early detection and advancing cancer care with imaging solutions and novel therapies such as theranostics. Collaborations like these exemplify our ability to leverage our broad portfolio and service capabilities to deepen relationships with customers, creating predictable revenue streams. To support this, we've strategically invested in capabilities that accelerate growth and expand margins while enhancing operational efficiency across the health care ecosystem.

In addition to organic investment, our disciplined capital allocation approach has strengthened our portfolio. For example, our planned acquisition of icometrix includes digital tools to help clinicians detect and quantify potential high-risk side effects in patients undergoing Alzheimer's therapies. Global approvals of these therapies are increasing, and demand for more frequent MRI exams and our PET amyloid agent, Vizamyl, are also growing. With the integration of icometrix technologies into our MR systems, we will strengthen our unique and comprehensive portfolio to support the full Alzheimer's care pathway.

This is a great example of our D3 strategy at work, smart devices and imaging, and drugs in PDx enabled by AI to create meaningful value for our customers and patients while driving sustainable growth for the company. As we continue to navigate a dynamic global environment, our teams remain agile and focused on operational improvements and actions to reduce tariff impact. We've mitigated approximately 50% of our 2025 gross exposure, and we're on track with our goal of delivering a lower net tariff impact in 2026 versus 2025 based on currently enacted tariffs. As a result of our strong performance year-to-date and the healthy capital environment trends we're observing, we're pleased to raise our adjusted EPS guidance, which Jay will expand on later in the call.

Above all, we're intensely focused on delivering for our customers and shareholders. With that, I'll hand the call over to Jay. Jay?

Thanks, Pete. Let's start with our financial performance on Slide 4. We're pleased with our solid operational performance across the business in the quarter. Revenues of $5.1 billion increased 4% year-over-year organically, ahead of our expectations. Revenue growth was driven by strength in our Imaging, AVS and PDx businesses.

We saw particular strength across EMEA and the U.S. On a reported basis, service revenue was strong, growing 6% year-over-year, driven by new and existing customer agreements. Product revenue was up 5% year-over-year, reflecting healthy customer demand and procedure volumes. We delivered robust organic orders growth in the quarter, up 6% year-over-year.

On a trailing 4-quarter average, orders growth was also up 6%. We delivered strong book-to-bill at 1.06x, and we exited the quarter with a solid backlog at $21.2 billion. Taken together, we believe these metrics as well as our success with multiyear enterprise deals and high-margin innovations are good indicators of future growth. Adjusted EBIT margin was 14.8%, down 150 basis points year-over-year.

We delivered adjusted EPS of $1.07 per share, down 6% year-over-year. This included approximately $0.16 of tariff impact. Excluding this impact, adjusted EPS would have been up in the high single digits year-over-year. Lastly, our free cash flow was $483 million in the quarter.

Looking closer at margin performance in the third quarter on Slide 5, adjusted EBIT margin of 14.8% was down due to the impact of tariffs, which was approximately $95 million and was partially offset by favorable volume and pricing. Excluding the tariff impact of 180 basis points, adjusted EBIT margin would have expanded approximately 30 basis points. Adjusted gross margin declined 300 basis points year-over-year, primarily due to tariff impact and investments. Strong volume growth and sustained pricing momentum have helped to partially offset broader macroeconomic margin pressures.

Related to investments, similar to last quarter, we had certain costs move from R&D to cost of goods sold as products move closer to commercialization, including in MR and PET. Without this shift, R&D expense would be up year-over-year, reflecting our continued commitment to innovation investment. We have a number of strategic programs underway to drive operational margin expansion. These include sourcing from lower-cost regions, developing second sources, implementing value engineering initiatives, executing targeted site transfers and achieving price increases.

These efforts are not only designed to improve our margin, but also strategically reduce our exposure to high tariff trade flows, further strengthening our global supply chain resilience and margin profile. Taken together, these initiatives contributed to the 30 basis points of adjusted EBIT margin improvement, excluding the impact of tariffs, and we mitigated nearly half of the gross tariff impact. We're also driving greater efficiency in SG&A while making targeted investments in commercial capabilities, such as with Flyrcado, to strengthen our go-to-market approach and support long-term growth.

These actions reflect our commitment to margin expansion and delivering sustainable value. Moving to segment performance, starting with Imaging on Slide 6. Organic revenue in the quarter was up 4% versus the prior year, driven by strong commercial execution in EMEA and the U.S., as imaging equipment remains a top investment priority for customers. Segment EBIT margin declined 260 basis points year-over-year, largely driven by tariff pressures. We're pleased that sequentially, both Imaging revenue and margin increased.

We're focused on disciplined price management as well as operational efficiency and platforming improvements. Overall, we saw robust growth in the U.S. as customers continue to upgrade an aging installed base in areas such as radiology and cardiology. Turning to Advanced Visualization Solutions on Slide 7. Organic revenue was up 6% year-over-year with strong performance in the U.S. and demand for new products. Segment EBIT margin increased by 180 basis points year-over-year, driven by volume growth and cost productivity.

We had strong execution in new products and commercial investments that are delivering faster growth and higher margins. This was the fourth consecutive quarter of year-over-year sales and margin growth for AVS. Our pipeline continues to focus on growing many clinical areas, including our cardiovascular ultrasound market leadership. Examples of this include our most recent Vivid Pioneer launch, which has been well received by customers and other key products for radiology and cardiology interventional procedures.

In addition, AI-enabled products launched earlier in the year are contributing significantly to our revenue growth and margin expansion. Turning to Patient Care Solutions on Slide 8, orders growth in the third quarter was healthy. However, organic revenue was down 7% versus the prior year, primarily due to a product hold. This hold has now been resolved and shipments for the impacted products have resumed, positioning us for a sequential sales step-up in the fourth quarter.

Segment EBIT margin declined by 680 basis points year-over-year, primarily driven by the product hold, unfavorable product mix and tariffs. With expected volume improvements and continued productivity actions, we anticipate a meaningful sequential improvement in EBIT margin in the fourth quarter. Earlier this year, we brought Jeannette Bankes as our PCS leader, and we're seeing progress around her efforts with the goal to improve growth and margin performance. She's working to drive commercial execution for recent product launches and setting the business up for sustainable growth.

She brings a new perspective. And her top priorities are accelerating growth, driving variable cost productivity and optimizing our cost structure. We're confident these actions will yield meaningful results. We're also excited about new product launches and AI-driven software solutions in PCS.

These build on our clinical capabilities and are expected to drive faster growth and higher margins. Moving to Pharmaceutical Diagnostics on Slide 9. We delivered a strong quarter with sales growing 10% organically year-over-year. This was driven by solid performance in our contrast media and radiopharmaceutical portfolios, both of which contribute to our growing recurring revenue profile. EBIT grew 14% while margins declined 150 basis points year-over-year due to planned investments in NPIs such as Flyrcado as well as the Nihon Medi-Physics acquisition.

We're very encouraged by the growth in our U.S. radiopharmaceuticals business and in our molecular imaging equipment. Imaging and PDx work in concert. And when enabled by AI and services, we're uniquely positioned to bring value in new ways for our customers. Let's look at cash performance on Slide 10. We delivered free cash flow of $483 million with a 99% free cash flow conversion.

This was down $168 million year-over-year, primarily due to higher receivables attributable to revenue growth as well as higher tariff payments of approximately $95 million. As it relates to our capital allocation strategy, our priority is to drive organic growth while evaluating a rich M&A pipeline focused on tuck-in opportunities. We'll maintain a disciplined approach that aligns with the key metrics we've discussed in the past. During the third quarter, we repurchased approximately $100 million of our shares, reflecting our confidence in our growth prospects.

Our strong balance sheet, coupled with an attractive leverage profile positions us well to execute on our capital allocation strategy. Now let's turn to our outlook on Slide 11. Given the strong performance year-to-date and healthy capital investment trends, we're updating our guidance for full year 2025. We continue to expect full-year organic revenue growth of approximately 3%. Based on where our rates are today, we expect FX to be a 50 basis point tailwind to revenue. Adjusted EBIT margin for the full year is unchanged in the range of 15.2% to 15.4%.

We remain focused on innovation, productivity. And G&A optimization to drive long-term margin expansion. We expect our adjusted effective tax rate to be in the range of 20% to 21% for the full year. For adjusted EPS, we're raising the lower end of our guidance range and now expect to deliver between $4.51 and $4.63 per share for the full year.

Based on the current environment, we continue to expect tariffs in 2025 to impact adjusted EPS by approximately $0.45 for the year. Finally, we expect to deliver free cash flow of at least $1.4 billion for the full year, which includes the tariff payments. With that, I'll turn the call over to Pete. Pete?

Thanks, Jay. Turning to innovation. We've invested more than $3 billion in R&D since 2022 to deliver differentiated products and solutions that exceed customer expectations. Our R&D and go-to-market execution is enabling accelerated growth and margin improvement.

A great example of this is in AVS. In 2024, we launched AI-powered systems across the entire segment. We've had strong customer adoption for these products. For example, in image-guided solutions, we redesigned our Interventional Cardiology system, Allia, with a more powerful tube, reduced footprint and onboard AI capabilities.

It's ideal for ambulatory surgical centers and office-based labs, allowing us to partner with customers and win new deals in a rapidly growing ASC setting. In addition, our ultrasound portfolio underwent a complete refresh. We integrated advanced technology like Caption AI and are upgrading our entire fleet of our clinical subsystems into common platforms, which has increased the margins of these new products compared to prior models. All of these are driving revenue growth and margin accretion now, and we expect that to continue in 2026 and beyond.

Moving to the middle row on the chart, where we featured several products that are commercially available in 2025. In PCS, we're excited about three new products, a completely refreshed anesthesia delivery system, a monitoring platform that allows us to compete in new ways outside the U.S. and CareIntellect for perinatal, a SaaS offering designed with clinicians to provide real-time insights in labor and delivery. It's the first of many clinical and operational applications that we expect to deliver faster growth, higher margins and recurring revenue for PCS. Feedback on Flyrcado is strong with exceptional image quality, half-life benefits, healthy reimbursement and new global guidelines to increase clinical confidence.

As a result, our prospect list is expanding. And we're going slow to go fast, so that customers get the best experience as this pharmaceutical has many years of strong growth opportunity in front of us. In September, we signed an agreement to distribute Flyrcado through CDL and an outpatient cardiology leader accounting for about 1/3 of the current U.S. PET procedures.

Our commercial and clinical teams are working closely with their CDL counterparts to begin transitioning their customer volume in the coming quarters. We're also encouraged by the strong backlog of new PET systems that will support imaging tracer growth. In Imaging, it's great to see the pipeline coming together after 4 years of investment. The new products will bring unique capabilities to the market and be key enablers for our sales teams to drive faster growth and higher margins in the Imaging portfolio.

We're entering a new wave of innovation across the enterprise, and these are some of our boldest ideas yet. We're confident that we have the right innovations across all of our segments, a strong commercial strategy and a clear path to accelerate revenue growth from these new products over the medium term. In summary, we feel good about our third quarter performance and the disciplined execution that has helped us effectively navigate a dynamic environment. I'm proud of our teams as they work to offset costs and manage through macro challenges.

We're pleased that despite a $0.45 tariff headwind, we expect to deliver adjusted EPS growth for the year. We remain fully committed to our total company medium-term targets shared at Investor Day and feel good about the underpinnings that support that growth. The fundamentals of our business remain strong. Globally, we continue to see a healthy capital equipment market, and tenders are improving in China, with the recovery ongoing.

While PCS had a challenging quarter, with new leadership and fresh eyes on the portfolio, we expect to see significant improvements in this segment. Lastly, as planned, we will introduce a significant number of new AI-enabled products, solutions and services at RSNA. As we discussed at our last investor conference, these new products are expected to drive significant growth over the medium term and play a key role in margin expansion, plan to join us in Chicago on December 1 and 2. Now let's open up the call for questions.

[Operator Instructions] Operator, can you please open the line?

[Operator Instructions] And it comes from the line of Lawrence Biegelsen with Wells Fargo.

Congrats on a nice quarter here. I wanted to start on China. I heard your comments earlier on tenders improving in China. Any additional color on what you're seeing, how you're thinking about growth there this year and next year?

And I know you won't comment on media reports, but can you comment on how you're thinking about your business in China long term? And if you'd consider ways to mitigate the risk or exposure to that market? And I had one follow-up.

Yes, Larry. As I said in the prepared comments, we're seeing the stimulus kind of tender activity improve and the recovery in the market is ongoing. I think that's kind of the headline. Last quarter, I spoke about our second-half China sales being lower than the first half, and that's playing out as we expected.

Our new leader in the role there, Will, is doing a really nice job. He's been focused on making investments in market access capabilities and renewing our focus on clinical selling. And where we've implemented those changes, which we're going to be going across the whole country with them, we've seen positive progress both in ultrasound and imaging. And so look, the market has been challenged over the past 2 years due to stimulus as well as the anticorruption campaign.

That said, we don't see any structural reason to prevent China market returning from growth. Look, to your last point that you made, look, we like the China business. It's one of the largest health care markets in the world, a significant portion of the population needing better access to care. We're optimistic about its long-term potential.

I would say, we constantly look at our segments, our countries, our products and assess their growth, their margin and ultimately, their fit in the portfolio. It's just kind of how we run our business, is what we do.

That's super helpful. Pete, for my follow-up, the press release, the slides talk about revenue growth acceleration. It sounds like you're still confident in achieving your [ '26 to '28 ] revenue growth target of mid-single-digit organic growth. I just want to confirm that. And how much do you need China to recover to hit that goal? And is mid-single-digit growth on the table for next year?

Yes. Look, I would just say, over the medium term, we feel good about mid-single digit. Our views are the mid-single opportunity hasn't changed for us. Since we spun in 2023, we've invested, as we mentioned, significant amount in R&D.

And it takes time for that to pay off. I think the example that we gave with AVS is a great example of how that's paying off. New products that have a faster growth profile because of leadership features a better cost position, so it has higher profitability. And that same model will apply to Imaging and also PCS.

So we're excited about RSNA coming up because you're going to see a lot of these new products coming out that will carry that capability that we just mentioned. So I think that's the broader point. But relative to China, consistent with what I've said in the past, if China remains roughly flat and stable market, all of our goals relative to mid-single digit are intact. Jay, you may...

Just Larry, in '26, we're in our operating planning process right now. So a lot of work to be done there. But I think it's safe to say this year, our expectation is to grow approximately 3%. We pointed to record backlogs, outstanding book-to-bill order growth at 6% for the last 4 quarters.

So we feel very good about the commercial momentum and the innovation momentum. And so as we look at '26, our expectation would be to grow faster than 3%. So stay tuned for our earnings call in February. But at this point in time, we feel very good about the progress that we've made.

Our next question is from Travis Steed with Bank of America Securities.

Congrats on a good quarter. Maybe the first question I have is maybe talk about some of the strength in Q3 and why it reiterate the full-year revenue guidance and not let more of that flow-through for Q4?

Thanks, Travis. We were definitely pleased with the commercial performance in the third quarter, and it's evidence of all the good progress that we're making both from innovation and also a go-to-market standpoint. We previously said 2% to 3% in the third quarter. We delivered 4%.

And I would say a lot of that comes from our AVS business, where we're seeing the dividends of all the innovation investment pay out, along with some great work in the field. We did see some particular strength across EMEA and [ U-Scan ], really driven by a healthy CapEx environment and the procedural trends there. So overall, definitely pleased with the third quarter. As we look at the fourth quarter, our current expectation is 3% to 4% growth, very much aligned to our expectations in July.

There's a bit of a benefit from the PCS, some of that coming back in the fourth quarter, that product hold. But as we did the analysis, historically, we've seen about a 9% step-up from Q3 to Q4. We're modeling at the midpoint, that 9% step-up. The other thing we look at when we do revenue forecasting is we look at this idea of secured rate. Remember, about half of our business is recurring and the other half is equipment related.

And for the equipment related, we have a portion of that business that has delivery dates in the quarter. And so at this point in the quarter, we have about 80% of the 50% secured. So we feel very good about where that sits relative to historic levels. It's consistent with that.

Having said all of that, what I would say is our confidence in achieving the 3% has clearly increased based on the strong performance that we saw in the third quarter.

That's very helpful, Pete. And then Flyrcado, just make sure you're on track for the $30 million in this year, and how you should think about some of the puts and takes as that ramps over 2026 and 2027?

Yes, Travis, look, we're excited about this opportunity with Flyrcado. Things -- opportunities like this only come around every once in a while. I mean the customer feedback on Flyrcado has been great, exceptional image quality over any other type of perfusion capabilities, the longer half-life unit dose model, all this kind of making a significant game-changing innovation for nuclear cardiology. And as I said in the prepared remarks, we're going slow to go fast.

So for us, it's crucially important at this stage of the launch that customers have an excellent experience and are getting their processes and capabilities in place that they can convert a majority of their patients to Flyrcado over a reasonable time period. So in 2025, we're going to be short of the 30 million. But with the progress we're making, we're really excited about the opportunity in '26 and beyond. So obviously, the question is, so why slower ramp in 2025?

Look, we made a deliberate decision to prioritize the customer experience rather than short-term revenue. And look, we've slowed the launch for two reasons. One is on the supply side, remember, each of these products is delivered by a local contract manufacturing operation. And we're working to achieve a consistent 95%-plus yield, which will deliver that exceptional experience to customers.

It's taken some time to get to that level, but we're close to achieving that consistently now, which is a very good point. Second, we're working with our customers on their workflow, which is a combination of their billing and patient processes at site. And so where we sit today, we're seeing week-over-week improvement on the number of patients treated with Flyrcado, and we expect that ramp considerably to move forward faster in the fourth quarter. So look, with significant interest building, our opportunity funnel is actually exceeding what we initially laid out.

We expect Flyrcado to have a significant meaningful impact over time. And this positions us really well on our midterm expectations for $0.5 billion by 2028. If we were able to take 25% of the PET myocardia perfusion market and converted to Flyrcado, that would lead to roughly $1 billion a year. And so hence, why this launch taking it at the right pace, we believe is super critical.

Our next question is from Joanne Wuensch with Citibank.

I have two. I'm just going to put them upfront. Could you please give us an update on the timing for Photon Counting? And how we should think about that ramping? And then the second question has to do with the Patient Care Solutions franchise. How do we think about going from down high single digits this quarter to reaccelerating over the next couple of quarters?

Thanks, Joanne, for the question. Yes, on Photon Counting, we remain on track to our plans that we have laid out. As you've seen on the slide that I referenced in our deck with the new wave of innovation, we actually have it there listed on the page; I think it's no surprise that we're ramping up here to be able to talk about it at our biggest radiological show here in the near future. So all of our plans relative to FDA submission our plan is to be able to communicate and talk about it in more detail are on track.

And again, I would just say, I'm, again, very excited about our approach. We are the most unique approach within the marketplace. It's the reason that we went this direction, is not to follow the crowd, but to bring something that's going to have a significant impact in the marketplace, not just on the image quality changes, but actually how CT is used. And that's where we believe our deep silicon approach is going to make a significant difference in what's called spectral imaging.

So that's where we are. And we hope we'll see at the RSNA to see more of these technologies that I mentioned here on the page. Jay, maybe you can talk a little bit about PCS.

We were disappointed with PCS performance in the third quarter. And really, this comes down to a product hold. We did take quick action to be ready to ship units as soon as possible. Our regulatory team did a great job navigating the pathway here.

And the good news is that we're back in the market shipping. We'll recover some of this in the fourth quarter. Some will bleed to next year. But overall, we feel good with the product back on the market.

Of the 7% sales decline in the quarter, about 5 of that was tied to the product hold. And the margin was also significantly impacted. In fact, about half of the margin decline year-over-year related to this product hold, we had a big tariff impact as well of about a couple of hundred basis points. So as Pete said or I said in my prepared remarks, we're really excited to have Jeannette onboard, a seasoned leader, and she's looking carefully at the portfolio, the opportunities to drive growth and enhance margin.

That will start to pay dividends in the fourth quarter, so we will see a meaningful improvement here. And then we'll also continue to pay dividends as we migrate into next year.

Our next question is from David Roman with Goldman Sachs.

Appreciate all the detail on some of the new products here. Maybe first, we could go into AVS and specifically talk about some of the opportunities as we see procedure volumes like in EP potentially start to move into the ASC. I think in your earnings presentation from last year in the second quarter, you laid out all the key products that GE provides to support an EP lab. But maybe what are you seeing specifically on the opportunity in the ASC setting for EP?

Yes, David. Thanks for the question. I would say, look, part of this started with this discussion when we talk about D3, it's not just a slogan, it's about how we operate, which again is this whole part of leadership products that can plug and play across the disease state -- focus on a disease state. So again, cardiology is a broader area, but a specific disease state might be electrical issues with the heart, to your point, and how they're addressed and then how digital and tools can bring that together.

And so for the first part for us was having a lab that wasn't just competitive, but was leadership. And I would argue this is really our first cath lab in a long, long time, that is a leadership position. And so we're seeing the uptick of that. So look, when it comes to electrophysiology, we see the opportunity that's out there, pulse field ablation, all the excitement that's in the marketplace.

We want to be the partner of choice. It's a one-stop shop to be able to make that happen. And so Phil and the team, I think, have done a really nice job. We're uniquely positioned with the Allia Pulse.

Its small footprint, its ability to play in ESCs. The Vivid Pioneer, our brand-new cardiovascular ultrasound platform does a lot of early assessment, esophageal work while the procedure is going on. And then our Mac-Lab new version, which is the AltiX, which is the recorder for all of this during the EP procedure. Those all work together.

And then we have partner relationships with many of the device companies that their products were more integrated with ours. So you couple that with the new reimbursement that's coming out that fundamentally takes what was 80% of the acute care reimbursement and makes it available in the ASC, we're really set up well to take advantage of that growth. And again, we want to be able to come to an institution and say, you want to really grow your EP business work with us. Whoever used on the device side, we can make it easy for you to stand up.

And in many cases, that's really what we're starting to see come through. So that's kind of how we look at electrophysiology. I would say, structured heart has a similar framework to it as well.

Very helpful. And maybe, Jay, just on the margin side, trying to understand, how long this transition between R&D and COGS takes place? And maybe if you could just unpack a little more operationally what's happening. I think on the last call, you started talking about this, it sounded kind of like an accounting dynamic, but I think it's actually more of an operational dynamic.

So how long does this kind of transition last? And how should we think about the trajectory of underlying gross margins in R&D going forward?

Sure. Maybe maybe let's just talk overall about the gross margin, and then we can get into the specifics of this aspect of it. Overall, in the third quarter, our gross margin was down 300 basis points year-over-year. About 180 basis points of that relates to tariff expenses.

And then we had 60 basis points of really reclass or movement between R&D and cost of goods in the quarter, and that's about a little over $30 million. Now overall, this is good news because from our standpoint, as products move closer to commercialization, we start to report those projects through -- those product expenses as cost of goods versus R&D. And so it's net neutral to adjusted EPS. We actually have about 12 products, material programs that are moving very close to commercialization stage.

Pete talked about that extensively during his remarks, you'll see that on full display at RSNA. And remember, about 70% of our total engineering and product program spend sits within R&D. The remaining aspect of 30 sits in COGS. And so overall, I think it's important to note, R&D spending or project spending was up for the quarter, but we did see this dynamic.

This dynamic will continue somewhat in the fourth quarter, and there will be some impact of this next year as well. But it's safe to say we will see margin expansion in the fourth quarter sequentially, north of 50 basis points of gross margin at the midpoint. And we'll also see -- remember the third quarter also did have an impact from the product hold at a company level, that was about 20 basis points. So overall, the team is intensely focused on margin expansion and gross margin expansion, in particular this particular item does sort of cloud, what I think is a solid overall story.

If you point to the bottom line, we saw 30 basis points of margin expansion in the quarter, excluding tariffs. We'll see more than that in the fourth quarter on our way to achieving the full-year expectation.

Our next question is from Patrick Wood with Morgan Stanley.

First one is really on the ultrasound side of things. Obviously, one of your peers has [ vice ] fund with the FDA. I think we all [indiscernible] through this before with Cleveland and CT. Any implications for you when you think about the competitive market on that side and how that could evolve?

Patrick, I -- we just saw the information as well. So I don't really have any comment. And there's really no effect in third quarter. The strength of our AVS in Q3 was really about really strong go-to-market execution in our field teams. And then products that we mentioned, the Vivid Pioneer and the Venue point of care and LOGIQ, all of those new products.

Got you. Makes sense. The other one is actually your MUSE platform has like a 50% market share, if I'm right, on the ECG side of things. And I know you guys have -- you've got a partnership with AliveCor and a few other bits, but is there any interest on the longer-term cardiac termitary market?

There's a lot of the perhaps players outside of things. Because that strength on the ECG side on the software end feels like that would pair well. Is that something you ever thought about?

Yes. So Patrick, I think, uses to your point, it's the significant position relative to recording of all EKG data really around the world, and we have this AliveCor mode, which is portable handheld device that individuals would use, and that can be recorded in the base. Today, we have customers that actually after an EP procedure when you use their sent home, they'll be sent home with the AliveCor device. And they do spot checks on themselves to make sure how effective the ablation actually was.

That data all connects directly back into our system. So that's there today. But I think that where you're going with this is exactly a big part of when we talk about CareIntellect, the perinatal example is one of those where we're connecting all this information and serving it up in a way that makes it very easy to use for that caregiver. So in the case you brought up would be in the cardiology world, perinatal play is obviously in labor and delivery.

But I think you're going to see more and more of these departmental solutions come out from us here in '26 under the branding of CareIntellect. So thanks for the question.

Our next question is from Vijay Kumar with Evercore ISI.

Congrats on the next gen here. Pete, maybe my first one for you. I saw you guys signed a distribution agreement with CDL on your pharma diagnostics side for [ Flyrcado ]. Is -- my understanding was CDL represents maybe -- or serves half the U.S. market.

Is that the right assumption? Have they started shipping this product? And do they have the capability to ship this on a weekend? So I'm curious on how the partnership is evolving.

Yes. No. Look, CDL and their group, CardioNavix, is a large part of the U.S. PET market, and they actually have a full distribution reach into individual cardiology offices typically with rubidium.

But our strategy is working along with them is to obviously convert many of those customers over into Flyrcado. We're just getting started. As you know, we announced earlier this quarter. It typically takes a 60-, 90-day window cycle to move through.

But all of the customers that have seen it on their side are very excited about it. I think the economics, the clinical capabilities, all of those play out to be a really positive opportunity. And so a higher percentage of that conversion of that group moves us very close along our goals that we've laid out over the medium term of $0.5 billion. And so they're a key part of it and starting out quite well.

Understood. And then just my related question on -- if I just look at your equipment book-to-bill, capital book-to-bill, if you will, last 7 quarters, you've ranged it around 1.12. And I know fiscal '25, some of the revenue recognition was impacted by timing of delivery, which was pushed out. So when you look at '26, Pete, is there anything unusual about delivery dates on these orders? Any change in cancellation trends?

Or cancellation trends been stable?

Yes, Vijay, we're definitely happy with the performance in terms of equipment book-to-bill, in terms of overall book-to-bill, in terms of record level of backlog. And then importantly, this trailing 4 quarters orders growth, which we think is perhaps a better indicator of performance than looking at on a quarterly basis. And so as we approach 2026, we think the setup is pretty good. We guided to approximately 3% this year.

We will -- there's a lot of work to be done to finalize our plan, but our expectation is we'll grow faster than that next year. And a lot of that comes down to the strength of the capital book that we currently sit on today.

And just, sorry, on cancellations here?

Cancellations is normal levels. We haven't seen any major changes in those in cancellation rates, Vijay.

Our next question is from Matt Miksic with Barclays.

So one follow-up on the sort of rollout of some of these new systems next year Photon Counting and total body. Just wondering if you could -- I know it's a '26 question, but talk a little bit about for launches like that in midyear and end of year, what does that look like in terms of capturing orders, capturing interest, building a pipeline? Is that ahead of that, understanding that your customers are where these are coming also? And just what's the shape of that?

And then I have one quick follow-up.

Yes, Matt. Obviously, each of the products is unique based on their regulatory approval files. Some might be approved in Europe first, some might be in the U.S. So there's a little bit of mix of that.

But the first part is to be able to make the announcement and get customers understanding when it's coming. To your point, there are certain products like full body PET and Photon County, we've been more transparent that are coming. And so a big part of this is when they come out is if they already have an order for an existing system and they want to upgrade to the other, how can you do that? Many of our design features have been done so that the footprint matches the predicate product the best it can.

So there's minimal site disruption that can help with faster turnaround. In most cases, we've done that with our products that we're coming out. But we typically have a fleet discussion with our big customers about what products do you have, how are you evolving your products. This is a big part of what our field teams do a very good job with and having customers be thinking about what budgetary dollars that they need to be having, thinking about which products are probably need to be upgraded based on age, but also based on what you want to do.

I think back to the question about EP, if that's a focused plan for you, what are you going to be doing with your fleet? So in many cases, customers have been already thinking about that. But until we actually announce it and give dates on availability, which RSNA for us tends to be one of those milestones in radiology; that's when people really then start doing the final planning.

Got it. Okay. So for at least maybe one of these that might be next year at RSNA and then that kind of makes it official from what you're saying that sounds like. And then other thing -- go ahead. I'm sorry.

This year at RSNA, we're going to talk a lot about all of our big launches. So I would say, expect to hear a good dozen of high-impact products that we'll be talking about at RSNA.

That's great. Look forward to it. And just I know AI is sort of one of these big broad topics that sort of means a lot and nothing, sometimes, at the same time. But just I really admire, I think a lot of folks recognize how much work you've done on sort of approved the software's device applications and roll out an investment in this area.

In the results that you're printing and the growth that you're showing, where and when and how do you think this is playing through your growth and engagement with your customers? Is it growth? Is it in, I don't know, defensive ability to defend accounts, to go deeper in accounts? Just as general, where do you see the value that you've invested playing out in the economic returns and growth in your business?

Yes, Matt, I'll just give you two quick examples. One is AVS this quarter, you're seeing it. It's loaded all of these products with different official intelligence capabilities that result in superior performance versus competition. So we actually are getting better price and higher capture rate.

So if you look at this quarter, we were actually up in margin as well. That's also due to the redesign that we've had to leverage what we've called platforming. So the combination of those two together has been able to enable that. The second phase -- and then all of these new products, like the ones I mentioned for RSNA are going to have that same type of AI inside.

This CareIntellect platform is a big deal for us because this is where we start actually having a departmental solution that starts connecting multiple modalities or multiple data flows to bring kind of longitudinal solutions. And so we're just entering into that phase. This labor and delivery is the first one. But I would argue relative to broader SaaS and stand-alone applications, that's really our first wave that we're going to see bigger capabilities coming out there.

And again, price and added capture rate where we're winning share, typically, it comes back to a really good device. But honestly, the AI and the software components of it is making the differentiation in the eyes of customers. I don't know, Jay, if you got anything.

Yes, sure. At the Investor Day, Matt, we talked about digital revenue expanding from $1.2 billion to $1.8 billion by '28, and we're well on track with respect to that. It remains an important growth engine. And I would say, implementation is going really well.

Notably, we went from 85 AI-enabled FDA device authorization last year to 100. So we're pleased with where we sit with AI-enabled devices. It's an important unlocker. But what we're seeing is, as Pete said, a lot of this is just a great way to differentiate our portfolio of products.

Our next question is from Robert Marcus with JPMorgan.

Great. Two for me. First, I want to start with the high-level question. It's about a year since you gave the long-range plan at the Analyst Day last November. Just wondering on year in, how you think you're stacking up versus it? Do you feel like you're still on track? And any puts and takes you want to highlight, as we just think about the outlook on growth and margins?

Rob, thanks for the question. Look, I think relative to mid-single-digit growth is as I've mentioned before, we feel quite good about the ability to be able to achieve that. This year, there's been added complexities with tariffs and things that we're navigating through, but we're navigating that well. And so from a margin standpoint, to be in the 17% to 20% plus range, we also feel very good about.

I think the underpinning of that is what we're being able to do within the field with our commercial teams. I think our go-to-market execution has been very good, both in large enterprise deals and individually at the street level. Some of that then comes back to this product portfolio. What we said and when we would launch products, we're right on to those dates, whether it be on the pharmaceutical side or be on the device side.

All those are lining up, as we laid out in that Investor Day back in November. So again, it's one of the reasons that we're very excited about this RSNA, big radiological meeting in Chicago, December 1 and 2, because that's going to showcase many of the products where we had some honestly, gaps in the portfolio and secondly, how those gaps are not only filled but we come with a product that's actually significantly different than what competition has. So that's kind of where we stand there, and we feel quite good about it.

Great. Really helpful. One quick follow-up on Flyrcado. It sounds like it's going a little slower this year, still confident in the long run.

Maybe you could just give us a little more on what GE HealthCare can do to help streamline the workflow conversion. There's obviously a change at the hospital level on what they need to do and how to source it. So maybe just help us on what investments you're doing to help advance that. And do you think you could be back on track to your goals in 2026?

So the short answer is absolutely back on track to our goals in 2026. And it starts with the opportunity funnel, meaning people that want to buy and convert to Flyrcado is much larger than we initially envisioned. So that's point one. And again, why is that? That comes back to anyone that sees this product that's from an image quality standpoint, and its ability to aid diagnosis is second to none.

So it starts with that. I think the economics now are clear on the private pay side as well as on the Medicare piece. And as far as how the models work, they actually work quite well for customers. So all of those things are in place.

And as I previously mentioned, getting the CMOs running, we have the recipe. But now the recipe is kicking in place to have 95%-plus, between now and the end of the year, we're going to ramp that at the right level of speed. So again, what does that mean? Well, you get a customer, new customer and they might be only doing 1 to 2 patients.

You want to have those 1 to 2 patients have great, great experience. And then maybe 60 days in, they move to 12 to 15 patients. And that ramp can happen very, very quickly once they have their process in place. The processes, Robbie, are no different than what you would think in other areas.

When you have a new product you bring in and a drug, you want to do your first billing to your private payers. Do you get the billing back? That process is working well, your flow about how you actually do the reads. So your cardiologist in your department referring for these procedures, the right software on the systems.

Those are the things that we now have a really tight structure in place to bring people up. In the case of like CDL, they have all that in place. So their ramp is actually a much faster capability than someone, lets just say, that's new to the area or had an oncology practice and now you're bringing up as a cardiology brand. So we're very confident that our ability to ramp this.

And again, the most important thing is do customers look at this and say, it's a game changer. And so I think that's the key. And then lastly is the cardiology, ACC came out with guidelines that basically say this is the best direction to go for myocardial perfusion. So we've got all of those tailwinds.

And again, the conversion factor here, I think, will ramp up rather quickly. But we wanted to obviously kind of lay out where we actually are for the year and talk about why it's so important to do this the right way and be deliberate because in the long run, this has clearly the potential to be a $1 billion drug at some point over in the future.

And our last question comes from the line of Anthony Petrone with Mizuho Americas.

Congrats on the quarter here. I'll stick with Flyrcado and one on tariffs. Maybe, Pete, to expand, you mentioned a larger PET and maybe possibly PET/CT backlog. Maybe how much of that is being driven by Flyrcado?

Does the existing installed base within GE of PET/CT systems, does that support this getting to $1 billion? Or do you need some of that on the capital side to be released in order to sort of let Flyrcado flourish here a little bit? And then quickly on tariffs, it stood at a net negative $0.45 headwind for this year. All else equal, the company was talking about mitigation efforts into '26. How much of the negative [ $0.45 ] can be offset into 2026?

I'll take the Flyrcado piece, and then maybe, Jay, you can touch on the second part on the tariffs. I think, look, without adding any more PET systems, I think I mentioned this prior is that if we were to just take 25% of the current pet myocardia perfusion market, just 25% of it, that's roughly $1 billion of Flyrcado revenue without one other scanner at it. And those are already in cardiology. To your other point, though, we are seeing the amount of PET systems increasing.

Now some of that is in cardiology for sure, but some of it's also in -- across the board in oncology because of the new molecules that are coming up, some of the new diagnostics capabilities that we actually have as well. So we're seeing both of those. But I think to your point, it's super important to understand just with 1/4 of the conversion of the PET MPI today away from rubidium to Flyrcado, that gets you to $1 billion, which, again, why it's so important that you manage the ramp appropriate and customers have a world-class experience when they do, the ability to convert a higher percentage of their patients over can happen rather quickly.

Sure. Quickly on tariffs, overall, as you noted, we're $265 million in tariff impact this year. We expect less than that next year. We're going through our planning processes right now to get the fine-tuned answer in terms of what the impact will be.

But it's safe to say it will be a tailwind. We're looking at things like structural changes to supply chain, continuing to work on U.S. MCA certification using free trade zones and then, of course, some selective pricing. But working together, we expect tariffs to be a tailwind next year to earnings growth.

And that concludes our Q&A session for today. Please proceed with any closing remarks.

Just thanks, everyone, for joining today, and we look forward to connecting with you those that will be attending the RSNA or one of our upcoming conferences.

And this concludes our conference. Thank you for participating, and you may now disconnect.