Q3 2025 Earnings Call Transcript

Ladies and gentlemen, good afternoon, and welcome to Hologic's Third Quarter Fiscal 2025 Earnings Conference Call. My name is Lisa, and I'll be your operator for today's call. Today's conference is being recorded. [Operator Instructions] I would now like to introduce Mike Watts, Corporate Vice President, Investor Relations, to begin our call.

Thank you, Lisa. Good afternoon, and thank you for joining Hologic's Third Quarter Fiscal 2025 Earnings Call. With me today are Steve MacMillan, the company's Chairman, President and Chief Executive Officer; Essex Mitchell, our Chief Operating Officer; and Karleen Oberton, our Chief Financial Officer. Our third 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 and a replay of this call will be available for 30 days. Before we begin, we'd like to inform you that certain statements we make today will be forward-looking. These statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied. Such factors include those referenced in the safe harbor statement included in our earnings release and SEC filings.

Also during this call, we will discuss certain non-GAAP financial measures. A reconciliation to GAAP can be found in our earnings release. Two of these non-GAAP measures are organic revenue which we define as revenue excluding divested businesses and revenue from acquired businesses owned by Hologic for less than 1 year. Also, organic revenue, excluding COVID-19 which further excludes COVID-19 assay revenue and other revenue related to COVID-19. Finally, any percentage changes that 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, Mike, and good afternoon, everyone. Thanks for joining us to discuss our financial results for the third quarter of fiscal 2025. We're pleased with our performance in the quarter as we delivered both revenue and non-GAAP earnings per share that exceeded our guidance. We've admittedly hit a few speed bumps in the last couple of quarters, but we view our results as clear evidence of the significant progress we have made in putting these bumps behind us as we return to higher growth while improving women's health. We have more work to do, but we believe our performance in the third quarter has us very well positioned for better results as we close out fiscal 2025 and move into next year.

Specifically, total revenue for the third quarter was $1.024 billion. This represented a slight growth of 0.4% and exceeded the high end of our guidance range by about $14 million. Our Diagnostics business continued to grow nicely compared to the prior year, and our Breast Health business improved sequentially as planned. Surgical met expectations, and we got a positive contribution from our skeletal franchise as previous supply constraints lifted.

These solid revenue results helped non-GAAP earnings per share reach $1.08 in the third quarter. This was a slight increase of 1.9% compared to a year ago and $0.01 above the high end of our guidance range. We maintained a very strong non-GAAP operating margin just above 30% as we controlled expenses across the organization and mitigated some tariff impacts. Importantly, our third quarter financial results have us squarely on the path toward accelerating growth that we described in our last call.

In fact, we completed our annual strategic planning process earlier this summer and are optimistic that we will return to solid mid-single-digit organic revenue growth next year and over our strat plan horizon. A key reason we are confident in this outlook is the strengthening of our Breast Health business. I want to spend a little time on this today since it has understandably been a focus for investors. Although Breast Health revenues declined in the third quarter versus the prior year, this was expected.

In fact, quarterly sales finished slightly ahead of our internal expectations. I want to highlight 3 areas that underpin this performance and excite us about our future. First, better commercial execution, both in imaging and interventional. In the third quarter, we shipped more 3D gantries than in the prior quarter, validating the sequential improvement we had forecast.

In the United States, especially, our new commercial leadership team began to build on the bifurcated sales structure and tighter processes they established earlier in the year. Based on this foundation, we rolled out a new strategy to upgrade older end-of-life gantries, which we expect to bear more fruit in the fourth quarter and into 2026. As we have previously discussed, gantry replacement cycles have become longer, but we remain encouraged that our leading market share remains intact and we believe this has been validated by competitive gantry wins in recent quarters. And while all of this was happening in mammography, interventional sales increased 6% organically, reflecting an easier comparable, but also the early benefits of our more focused domestic sales force.

The second reason we are excited about Breast Health and a major reason we continue to win competitively is our consistent delivery of both clinical and product innovation. For example, a retrospective study we published recently with physicians from Sanford Health in South Dakota, evaluated more than 180,000 mammograms conducted over 10 years. This real-world study found that high-resolution 3D mammography conducted with our Clarity HD software was associated with higher cancer detection rates, than our standard resolution 3D. This is one of the scores of clinical studies published by our radiology customers that demonstrate the value of our technologies creating by far the deepest body of evidence in our category.

In terms of product innovation, this quarter, we are launching our latest artificial intelligence solution, Genius AI Detection PRO which will extend our leadership in breast focused software. This cloud- based solution developed with our partner, Therapixel, is essentially an all-in-one AI assistant for the radiologist. It analyzes prior and current mammograms through a 2D and 3D deep learning algorithm for increased accuracy and faster throughput, a single streamlined interface boosts efficiency up to a 24% reduction in reading time by capturing all key information in one place. This includes breast density scores, patient history and lesion and case scores.

The software will even check image quality and automatically pre-populate the radiologist report with key findings. It is being sold as an upgrade on our three dimension system now and will be available on our next-generation instrument Envision when it launches next year. Third, we are really excited about Endomagnetics, which we acquired last summer. Endomag expands our portfolio of breast surgery products as we offer additional value across the entire breast cancer continuum of care.

As a reminder, Endomag markets 2 primary disposable products, Magseed, a tiny wireless seed that enables breast surgeons to quickly find and remove a tumor. And Magtrace, a radiation-free tracer that finds and maps target lymph nodes to be removed or biopsied during surgery. Both products operate with a small piece of capital called the Sentimag system. In the third quarter, Endomag contributed nearly $20 million of revenue at a very healthy gross margin.

The business has been exceeding our deal model and we'll begin adding to organic growth rates in August. Before I turn the call over to Essex, let me conclude by saying that the operative word for Hologic in the third quarter was progress, progress in exceeding our near-term financial commitments, progress in strengthening our Breast Health business and progress toward accelerating overall company growth in the fourth quarter as well as '26 and beyond. All in all, we are confident in our path and optimistic about our future. Now I will turn the call over to Essex.

Thank you, Steve, and good afternoon, everyone. In my remarks today, I will first review our divisional revenue performance in the third quarter. Then I'll provide an update on the positive progress we have made in mitigating tariffs. As Steve said, our results in the third quarter were strong, with revenue of $1.024 billion, exceeding the high end of our guidance.

While we faced several challenges this year, we believe they would be temporary. And we're excited to see the momentum building across the business as we look toward FY '26. Starting in Diagnostics. Third quarter revenue of $448.9 million grew 0.9% or 2.9% organically, excluding COVID-related sales. As a reminder, much of the geopolitical turmoil we've discussed this year affects our Diagnostics business, specifically funding cuts to U.S. aid in Africa and the challenging operating environment in China lowered otherwise solid growth in the third quarter.

As our team navigates these headwinds, the underlying growth drivers in diagnostics remains strong. We are still in the early innings of vaginitis and Biotheranostics opportunities. Worldwide Panther utilization continues to reach new all-time highs. And our cytology customers are excited about the rollout of our Genius digital cytology platform.

Molecular Diagnostics continued to lead the way in the third quarter with global growth of 2.4% or 5.2% excluding COVID. In the United States, molecular growth -- molecular grew 7.3%, excluding COVID. Growth was driven by strong sales of our BV, CV/ TV assay and our portfolio of Panther Fusion assays. Our Diagnostics team has done an outstanding job taking BV, CV/TV from a new product in 2019 to what is now our second largest assay.

Much of the growth we realized to this point has been from converting existing manual testing to our fully automated high throughput Panther system. There's still meaningful opportunity to convert more of this testing demonstrated by several key account wins this quarter, but the larger opportunity will be to reach the estimated 60% of women in the U.S. who aren't tested at all when they experience vaginitis symptoms. To this end, we've deployed our physician sales force to provide education and awareness at the provider level, leveraging the same strategy we use to grow testing for sexually transmitted infections.

Before moving on, I'd like to highlight our Panther Fusion sidecar and how it will play a key role in diagnostics growth moving forward. As we emerge from the pandemic, two things became clear across our customer base. Customers love the workflow advantages of the Panther and labs were looking to consolidate their testing into fewer platforms. The latter is the opportunity for Panther Fusion.

Fusion uses PCR technology to unlock our full menu of 23-plus assays spanning across several testing categories. Currently, fusion is mainly used for respiratory testing but we've been seeing good traction this year as customers adopt more menu. In particular, our Open Access testing kits contributed to solid Fusion growth in the third quarter. Open access gives labs a flexibility to run their own lab-developed tests on our Fusion platform.

In addition, over the next several years, we plan to further diversify our menu by launching IVD test for GI and hospital-acquired infections. As we continue to deliver this innovation it further cements Hologic as an indispensable presence in the molecular lab. Turning to our cytology and perinatal businesses. Third quarter revenue declined 2.2%.

This result was expected given the reduction in our China forecast that we discussed the last quarter. Excluding China, cytology would have grown low single digits for the quarter, a solid result that was fueled by the rollout of our Genius digital diagnostics system. As we implement Genius at more laboratories around the world, we received resoundingly positive feedback. Genius transforms the traditional manual review of path slides, which was previously conducted on glass under a microscope by capturing a digital image of the slide.

This digital image can then be reviewed remotely from anywhere in the customer's network on our review station. Using our proprietary artificial intelligence algorithm, Genius identified precancerous lesions and cervical cancer cells for examination by lab professionals, enabling a faster, more accurate diagnosis. These workflow advantages not only address their growing labor shortages our customers face but also enable cervical cancer screening in areas of the world where infrastructure is limited. Because the Genius system requires an overhaul of the traditional pet screening workflow, we expect the full rollout would be a multiyear process, contributing to growth for the next several quarters.

Moving to Breast Health. Revenue of $365.2 million declined 5.8% or 10.8% organically, excluding Endomagnetics and SSI. The decline versus prior year was expected as the third quarter of FY '24 presented our toughest comp of the year. Importantly, as Steve mentioned, revenue grew sequentially compared to the second quarter and finished slightly ahead of our internal goal.

We were encouraged to see the progress in Q3 that gives us confidence this business is rebounding and will return to growth in Q4. Most apparent in the third quarter results was the strong interventional performance, growing 31.8%. Endomagnetics played a big role in this growth and turned organic in Q4. But even excluding Endomag, organic interventional sales grew 6%, showing the immediate impact of our refocused sales force. Turning to Surgical. Third quarter revenue of $178.4 million increased 6.3% or 1.2% organically, excluding Gynesonics.

Growth continues to be led by international, which grew 24.8%. The investments we've made in our commercial and market access capabilities outside the United States have significantly expanded the reach of our minimally invasive surgical products. International Surgical growth was driven by 2 key factors in the third quarter. Adoption in markets where reimbursement has recently been established and expanding into new markets altogether, and we're encouraged by the strong momentum across our entire surgical portfolio.

For example, NovaSure, which has faced challenges in the U.S. has consistently delivered double-digit growth internationally over the past several quarters. This highlights the significant opportunity we still have to elevate women's health globally. Finally, in our Skeletal business, third quarter revenue of $31.3 million grew 62.1% as we resumed shipping our final DEXA model in the quarter. Sales were roughly in line with our expectations but higher than historic levels as we've continued to meet pent-up demand from the prior shipping hold.

Before I turn the call over to Karleen, I wanted to provide an update on the positive progress we have made in mitigating the impact of global tariffs on our business. As a reminder, last quarter, we shared a worst case tariff estimate of $20 million to $25 million per quarter. We anticipated that approximately 2/3 of this amount would come from the 10% tariff with imports from Costa Rica, where we manufacture most of our surgical and interventional breast health products. Shipments of both -- shipments of products to and from China, represent the next largest portion, accounting for roughly 15% of the total.

Our team has been hard at work over the last 90 days, evaluating options to reduce this tariff impact. Through changes to our global supply chain and operating model and various procurement efforts, we expect to mitigate roughly half of the amount we originally provided. This means we now expect to incur $10 million to $12 million in tariffs per quarter. Of course, this is based on tariffs as they stand today and is subject to change.

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

Thank you, Essex, and good afternoon, everyone. In my comments today, I will start by walking through the rest of our non-GAAP income statement, then touch on several key financial metrics and finish with our guidance for fiscal Q4 and the full year. In the third quarter, we delivered EPS of $1.08 growing modestly versus the prior year and exceeding the high end of our guidance range. Strong execution on the top line helped to achieve these results with all our global divisions meeting expectations in the quarter.

Now to the rest of the income statement. Non-GAAP gross margin closed the quarter at 60.3% representing an 80 basis point decline compared to the prior year. This decrease was driven by product mix, but also by a reserve recorded in our Skeletal Health division based on our plan discontinued sales of our Fluoroscan InSight system at the end of the fiscal year. This was a strategic decision based on the product's low gross margin and growth potential and limited fit in our portfolio.

Fluoroscan is expected to generate about $18 million of product and service revenue in fiscal 2025 before we stop selling it next year. I should also mention that cost of goods sold included about $1.4 million of tariff expense in the third quarter, less than anticipated, in part as a result of our mitigation efforts. Moving down the P&L. Third quarter operating expenses of $309.6 million increased 2.2%.

This increase was driven by the inclusion of Endomag and Gynesonics in our results as well as increased expense related to our deferred compensation plan. Excluding these acquisitions, operating expenses would have declined 4.3%, underscoring our commitment to disciplined expense management and operational efficiency across the organization. Third quarter operating margin finished at 30.1%, representing a decrease of 110 basis points compared to the prior year, but still best-in-class relative to our peers. This decrease reflects the dilutive impact that Endomag and Gynesonics currently have on our bottom line.

As we continue to integrate these acquisitions, however, we do expect their profitability to improve especially since both already have gross margins that are accretive to our corporate average. Below operating income, other income net was a loss in our fiscal third quarter of slightly less than $6 million. This was better than anticipated as the increasing value of investments related to our deferred compensation plan largely offset the increase we saw in G&A expense from strong equity market performance in the quarter. Finally, our tax rate in Q3 was 19.25% as expected.

Altogether, net margin for the quarter was a very healthy 23.8%, decreasing 100 basis points compared to the prior year, but increasing 60 basis points sequentially. Combined, these results led to non-GAAP earnings per share of $1.08, slightly exceeding our bottom line commitment. Our strong profitability helps to drive excellent cash generation as we delivered $343 million of operating cash flow in the third quarter. We finished the quarter with $1.88 billion in cash and short-term investments on our balance sheet and a net leverage ratio of 0.6x.

We also refinanced our credit agreement earlier this month, so we continue to enjoy tremendous financial and strategic flexibility. Now let's move on to our updated non-GAAP financial guidance for the full fiscal year and fourth quarter. For the fourth quarter, we are expecting total revenue of $1.03 billion to $1.04 billion, and non-GAAP EPS in the range of $1.09 to $1.12. I would point out that based on our good performance in Q3, the sequential step-up that is required in Q4 is much less than we previously forecasted. At the midpoint of these ranges, we expect mid-single-digit revenue growth and high single-digit EPS growth in the fourth quarter.

This would mark a return to our longer-term goals for financial performance. For the full year, we are also calling up the midpoints of our guidance ranges for revenue and EPS based on our strong performance in the third quarter as well as lower tariff headwinds. We now expect revenue in the range of $4.081 billion to $4.091 billion and non- GAAP EPS of $4.23 to $4.26. All in all, remain on the financial improvement path that we outlined earlier this year, stabilization in Q2, progress in Q3 and a return to growth in Q4. As our teams continue to execute on this plan, our divisional outlook from our prior guidance remains largely unchanged.

However, there are a few trends worth calling out for the fourth quarter. In Breast Health, as Steve and Essex discussed, we expect to return to slight top line growth in the fourth quarter. Compared to the prior year, our Diagnostics business outside the United States will continue to be affected by the difficult operating environment in China and reduced funding for our HIV test in Africa. In Surgical, we expect to benefit from an easy comparable period in Q4 of fiscal '24, coupled with better commercial execution.

As a result, we anticipate the fourth quarter will be our strongest quarter of revenue growth for the year. In Skeletal, we anticipate outsized growth in the fourth quarter as we'll be comping against a full quarter of the DEXA stop-ship in the prior year period. In 2026, however, Skeletal revenue will be less than in recent quarters, as we will have fulfilled pent-up demand and stopped selling our Fluoroscan product. To help with a few other modeling items, based on recent foreign exchange rates, the weaker U.S. dollar should represent a tailwind of approximately $6 million in the fourth quarter.

We expect COVID assay sales to be about $5 million in the fourth quarter and sales of COVID-related items to be about $25 million. Finally, we expect blood screening revenue of about $5 million in Q4. As a reminder, both COVID-related sales and blood screening revenue are backed out of our organic growth calculations. Moving to the rest of the P&L. Our full year expectations for gross and operating margins in the low 60s and low 30s, respectively remain unchanged.

In the fourth quarter, we do expect to incur about $8 million of tariff expenses. And as Essex said, this number will increase to $10 million to $12 million on a quarterly basis in fiscal 2026. While this is roughly half what we originally expected, it will still represent a headwind to gross margin of almost 100 basis points compared to this year. Below operating income, we estimate that other income net to be an expense of approximately $20 million in the fourth quarter. Our annual effective tax rate of 19.25% and diluted share count of 228 million shares for the full year are both unchanged from our previous guidance.

To conclude, our strong third quarter results were an important step in the right direction as we delivered revenue and non-GAAP EPS above our guidance ranges. We expect to build on this momentum in the fourth quarter, and we believe we are well positioned to finish the year from a position of strength as we enter fiscal '26. With that, we ask the operator to open the call for questions.

[Operator Instructions]. And our first question comes from Doug Schenkel with Wolfe Research.

So just I'll throw up 2. First, you talked about continued progress you made in fiscal Q3. You're expecting around 4.5% organic growth in Q4, which would be the strongest since the pandemic. The Street is modeling a continuation of trends in fiscal '26 recognizing we have to wait another quarter for formal guidance. Are there any dynamics we should be contemplating in our models, either tailwinds or headwinds that could move you off trend towards continued progress and continued momentum into fiscal '26. And then just the second question is, we have heard about some China DRG impact in the quarter for other diagnostic companies.

I don't think this would be a meaningful factor for you guys, but I just want to make sure there was nothing there that had impact for you guys in the quarter.

Yes, Doug, I'll just start off with the outlook for '26. I agree. I think we said in our prepared remarks that we're expecting mid-single- digit growth for 2016. I think a couple of things that I would call out is the Fluoroscan discontinuation. We talked about that. It's not terribly significant, but call that out.

And the other piece is that the headwinds that we are realizing this quarter and next quarter related to China and HIV will also impact the first half of fiscal '26. So I would factor that implications into your outlook for next year.

And our next question comes from Jack Meehan with Nephron Energy.

I wanted to ask you about capital allocation in the quarter. It was a very strong quarter of cash flow. Didn't expect the balance sheet cash to tick up. I was curious what your thoughts are around M&A. Are there any larger things in the funnel that you were considering?

No, not particularly. I think the way to think about it, Jack, is through the year-to-date, we've spent over $750 million on buybacks. And it's sometimes a little more in a quarter, sometimes a little less, overall feel good about what we have done. And certainly, we'll continue both to focus on M&A and buybacks, but there was nothing gearing up to do something big.

Got it. And then I wanted to follow up on the Breast Health business. Good to see the progress. I agree that was the key word here. I was just curious, your feel like within the overall company context looking into 2026, how you feel about the reception around the new product launch and also just durability of gantry replacement continuing to progress in the next year?

Yes. I think really, as we think about not only next year, but the next few years, starting to feel like we've really got the hiccups behind us in that business, and we're going to be end of lifing a lot of the older gantries. We'll be launching Envision and very excited about what that's going to bring. And that's really, call it, second half later '26-ish before that really starts to be meaningful, and that's going to be a big driver probably in '27, '28, '29 as you well know.

And the other part I would keep your eyes on will be the interventional business. You might notice that hit $100 million this quarter for the first time. It's starting to become a really nice driver and really starting to pay off that vision we put in place years ago of the breast care continuum and really starting to get that business, which is both recurring revenue and better margins. And we're feeling really excited about where that's headed.

And we'll take our next question from Patrick Donnelly with Citi.

Maybe a follow-up there on the breast side. Can you just talk about the visibility into 4Q? Certainly, a big focus from investors in our conversations, just the progress there, the step up. It sounds like you guys are confident in the rebound here.

It sounds like maybe some of the sales changes are very improved. But can you just talk about the building blocks 2Q to 4Q to get back to growth? It sounds like interventional, you're feeling pretty good about. But just curious how you're thinking about the visibility here into the 4Q return to growth on the breast side.

Yes. It starts with the sales force and the rigor and discipline and processes and leadership that's been put in there where just as we're coming into the quarters now, we've got much more clarity around where we're headed. We're getting off to better starts in the quarter and feeling really good. And that team now has hit what they've said they're going to hit each of the last few quarters and just our degree of confidence and belief in them has gone really high.

So I think we're feeling really good about that. The other part that will be nice is Endomag as we said, is running well ahead of plan in the final 2 months of this quarter, that starts to flip into organic revenue because we've just actually closed it just about a year ago today almost. And so we're really excited about how that continues to go. So it's just one of these that I think we went through a little rough period on Breast Health.

Again, it's going to be -- continue to show me, but we can see the trends and really starting to feel so much better about that business. Proof will be one, obviously, we want to put back real growth in the coming quarter and then have that really accelerate. I think we see our Breast Health business being even stronger next year than where we'll even finish this year.

Before we move on -- yes, go ahead. No after you.

Sorry, I was just going to say, Karleen, maybe on the margins, can you just talk about -- obviously, there's some moving pieces, right, with the tariffs and even this product discontinuation. Can you talk about where we're going to be on 4Q? It sounds like the low 30s is a good place to be in. And then what the right launching point is as we think about just progressing into '26?

I know it's usually not the exit rate, so I just want to make sure we're thinking about it correctly.

Yes. We are expecting a step up Q3 to Q4 in gross margins. It starts for us the revenue with higher revenue and similar to the product mix with the higher gantry portion of the revenue. Those are margin accretive.

And then coupled with Q4 is always seasonally our lowest operating expense quarter. And then we won't have the onetime charges that we had here in Q3. I think the outlook, I would say the Q2 operating margin is not your jumping off point for the full year, '26. I would look to the full year of '25 as more of the jumping off place for margins. We would expect that as we absorb the incremental tariffs, we will be in line with '25 in that range.

Patrick, sorry to interrupt here, but I wanted to just come back to Doug's question a couple of questions ago, we kind of got interrupted there. Yes, on China. So sorry about that. We're not directly exposed to a lot of the specific issues that some of our peers are in China.

But as we talked about last quarter, it has become a pretty challenging environment for us for a number of reasons. So as we predicted, total China was less than a $10 million business for us in the third quarter and was down more than 50% compared to prior year. So I just wanted to tie that one up.

And our next question comes from Vijay Kumar with Evercore.

Steve, helpful color on fiscal '26, return back to a solid mid-singles. The -- are we excluding -- is COVID a headwind, Steve? Are we backing that out when we say mid-singles. And I know Fluoroscan that's moving to disc ops?

Should we be removing that and then calculating organic, excluding COVID in disc ops? Or how are you thinking about organic when you say solid mid-singles, the 4, 4 plus? Or is that more of a 5, 5-plus.

Yes. No, no, no. When we talk about the mid-single digits, I would say the ex-COVID is really inconsequential at this point. So I wouldn't push the number up because of that.

I'm sorry, on Fluoroscan. Karleen, should we back that out when we were calculating organic?

Yes, we do organic, if that's a discontinued product, I'd back that out.

Understood. And Steve, one for you on Endomag. I think that this business grew like 100% in the quarter, right? Was there any timing element, I think you're annualizing at $80 million. If this thing can grow like strong double digits, right, this -- it could be a sizable organic contributor. So was there any one-off in 3Q? Like what is driving the strength in the business?

No. It's really our commercial execution. We took it over fully in the United States. If you recall, when we acquired this, it was going through a different party that had the distribution rights in the United States.

We took it over at the very end of our previous quarter, and it looked a little sloppy last quarter because we had an inventory adjustment as we bought back inventory this and that. This -- the magic of this business right now, I would tell you just from watching daily sales is it's just incredibly steady and growing. And I think it's where we feel really, really good. Our whole team was just over in the U.K. about a month ago. with the team over there that had developed the products and no one- offs.

And I think both domestically and internationally, we feel really good about where it's headed.

And we'll go next to Lu Li with UBS.

I think the first one on the molecular diagnostic. I think you mentioned that you're going to have a test menu expansion on Fusion. I wonder if you can comment a little bit on the timing and the potential revenue contribution down the road.

Yes. I would think that those assays will come online probably later in '26, early in '27. So probably not meaningful contribution next year more in the '27, '28. But I would just caution that these are what I'll call incremental assays to the menu, they're not a BV CV- type opportunity.

And a good example of that is the open channel product that's available now, good contribute to growth in the quarter, but is relatively small in the grand scheme of things.

Got it. And Karleen, I think one of the questions I wanted to follow up on is the size of the China impact and HIV impact in 2026. So you mentioned there will be some residual headwinds in the first half. I wonder can you quantify what will be the magnitude of that?

Yes. So I think in the first half of '25, our China business was more on track to be a $60 million to $70 million business. We're exiting more at a $10 million a quarter. So that's the rough difference in the first half of the year.

And then there's the HIV -- the HIV business was stronger in our first quarter, 1.5 quarter -- really our first 2 quarters, and we're assuming that's going to de minimis numbers into next year.

And we'll move next to Anthony Petrone with Mizuho Group.

Congrats on a solid quarter here. I think I want to maybe just focus on Fusion for a moment there, and you gave some good updates last quarter in the prepared remarks here. And the goal is to get Fusion to 100% of Panther. Maybe could we get an update on the Fusions that are out there today, just where is their utilization intensity versus a non-fusion platform?

And then how does pricing on a Fusion platform stack up to non-fusion assays? And I'll have one quick follow-up.

Yes. So let me start off to clarify that the goal is not for every Panther to have a Fusion. It's really for every customer or every lab to have a Fusion capability within the lab. We never anticipated that it would be a one-for-one situation.

What I would say is I think it's still plenty of run room in rolling out more Fusions to our customers, probably over 1/3 of our customers have a Fusion at this point, and that will continue to grow over our strat horizon period. And I would say just from a pricing perspective, of course, the women's health assays, the legacy assays are obviously the least pricing on the legacy Panther. So we would expect that as the menu rolls out in Fusion, it probably -- it will be a pricing premium.

That's helpful. And then just on the mammography side, gantry, obviously, next year 2026, looking for more of a meaningful ramp. But just maybe on the inventory build and working capital, should we expect to see working capital uptick here in the second half of the year as the company prepares more for that full launch next year?

No, Anthony, I would not anticipate an increase in inventory to support that launch at this period of time. I think we're well positioned to handle that. Many of the components are similar to our legacy 3D gantry. So I wouldn't expect any meaningful change.

And our next question comes from Andrew Brackmann with William Blair.

Steve, you opened the call sort of discussing your confidence in returning to that mid-single-digit growth, not just for '26, but it sounded like over the entire strat plan. So can you maybe talk about that target in the context of how international plays into the buildup there? And then as my follow-up, maybe just talk about how pricing and your ability to take price plays into that as well.

Yes. I think as we look over the strat plan horizon, we see international being accretive to that growth rate with kind of, again, probably some caveats, the beginning of next year might be a little squirrely because of the Africa stuff, because of China. But in general, over both really the bulk of '26 and beyond, we see international continue to be a really nice grower to that point. And then regarding pricing, we probably see it a little bit more of our opportunities is in mix and new product innovation versus actual kind of year-over-year price increases.

We're looking at targeted price increases here or there where we can. But in general, it's much more about the innovation curve, so it's more of a mix gain than a price gain.

We'll move next to Navann Ty with BNP Paribas.

Just a clarification on Breast Health. So have the updated end-of-life strategy and refocused sales force being fully implemented in Q3. So we have most results in Q4 and minimal impact in Q3. And then on the M&A side, can you discuss the M&A environment in Health and for Hologic?

Sure. On the Breast Health piece, I think what we're really encouraged by is typically, when you reorganize the sales force, you have to take a step back or two. And I think our team implemented really the sales force restructure largely in our second quarter. And if we would have seen the disruption, it usually would have been in this third quarter-ish, and the teams have really settled in very, very nicely on that.

So we feel very good. And it was really just this quarter where they began the end-of-life strategy. So that's in the early stages, but with some very good early wins. And I think we've already seen some lined up here for this quarter, which is our fourth quarter and then looking into next year.

In terms of the M&A environment, we -- I'd say there's 2 pieces. One is we continue to be patient and looking for more things like the Endomags and the Gynesonics, the Biotheranostics that have been our more recent deals. And we've also dramatically strengthened our own capabilities over the last few years and both in the divisional area and corporately to where we feel really good about those last few. And we've continued to walk away from more things than we're acquiring.

But it feels like the deal -- the funnel of size deals that we like is very good right now, but actionability, we'll continue to see, and we're going to be patient and do it from a position of strength.

Our next question comes from Ryan Zimmerman with BTIG.

This is Izzy on for Ryan. Just one for me on tariff impacts. It's great to see that you guys have been able to mitigate about half of what you called out last quarter. I was just curious if you could provide a little bit more color on the steps you took that allowed you to get to this rate.

And if you have any more levers as we move into next year, just given the fact that this is still a pretty dynamic situation.

Yes. Well, we certainly continue to evaluate the situation. And to your point, this can change daily. But basically, we leveraged operational efficiencies within our supply chain to drive those changes. And just for competitive reasons, we're not going to comment anything more specifically.

And we'll move next to Casey Woodring with JPMorgan.

Maybe the first one, can you just unpack -- can you just unpack the breast imaging revenue number in the quarter? You mentioned 3D gantry placements grew sequentially, but imaging revenue declined sequentially. So just maybe some more color there. And then how you're thinking about gantry placements and imaging revenue stepping up in 4Q?

Yes. So it's within that imaging line, there is more than just the 3D gantry. So the 3D gantry line itself did sequentially increase quarter-over-quarter. There were some other components that were down quarter-on-quarter, but definitely the 3D was up.

And I think to Steve's comments, looking into Q4, we're absolutely expecting another sequential uptick in the number of gantries -- 3D gantries shipped in Q4, and we feel really confident, and we have much better visibility at this point in this quarter than we even did in Q3. So that gives us confidence that we'll be able to deliver that uptick in gantry.

Got it. That's helpful. And then if I can just squeeze one more in. Just how should we think about the diagnostic setup for fiscal '26. Molecular is becoming a larger part of the base here as is BV, CV/TV and Biotheranostics within that revenue line item.

So just curious at what point you'll run into the law of large numbers there. And ultimately, where do you think diagnostics growth will shake out relative to that mid-single-digit range for next year?

Yes, I'll start off. For next year, I think we expect diagnostics to be within that mid-single-digit range and primarily because of that first half headwinds that we talked about that are pressuring the growth in both cytology and molecular because of China and the HIV. So we feel really great about the Diagnostics business. I think we called out BV, CV still lots of runway there.

Just a couple of headwinds in the first half of '26, but over the longer term, we expect Diagnostics to be a strong contributor to our growth.

Yes. The core business of our molecular, our Panthers, the expanding Panthers with our Fusions and then bringing more menu on there, we've got a really good short- and mid-term outlook for the Diagnostics business. And even our Genius digital diagnostics has been breathing some life into cytology, keeps that from certainly declining very low growth. But overall, continue to be very excited about the opportunities despite it getting much bigger.

Our next question comes from Mason Carrico with Stephens.

This is Harrison on for Mason. Could you talk about the benefits you're seeing so far selling into magnetics through your direct sales force. How is that initial transition played out? And could you talk about the demand you're seeing from your customers there?

Yes. I think we're feeling really good based on the fact that we sold almost $20 million of Endomag in the quarter. And the other benefit that we have is by bifurcating the sales force, as we also indicated, we saw organic growth of about 6% in the interventional line. So what we've got now is more dedicated sales force that's able to really focus in on that customer group and feeling really good about where that's headed.

Great. And in the Breast Health business, are you seeing early signs from the commercial reorg starting to bear fruit there? And how has demand shaped up following instituting that initiative?

Yes, sure. So I think as we said in our prepared remarks and Steve highlighted here that we're seeing great traction early on. Typically, when you have a disruption in the sales force reorg, you might take a step back, but clearly, we have not taken a step back here in the third quarter and feel good about the commercial leadership in a lot of the plans they've put in place from the reorg of the sales team to the end-of-life strategies and getting ready for the Envision launch in '26.

And our next question comes from Tycho Peterson with Jefferies.

This is Jack on for Tycho. Just on Genius cytology, which you touched on in the call, would be great if you could share some metrics that you're seeing regarding penetration or growth that can sort of help frame the contribution of the new product and sort of its contribution to second level growth?

Yes. So we haven't really put out any metrics that we're going to share publicly, but I'll just offer a couple of comments. One, from a revenue model perspective, a lot of the elements of the cytology selling the collection kit do not change. What does change is that we get an uptick on the digitization of the image, which enables the AI capabilities within our Genius platform.

What I'd also say is that this is a significant workflow change within the lab. So the rollout has been slow and measured given the significance of the change. But despite that, the feedback is overwhelmingly positive of what this enables from an efficiency. And hopefully, at some point, clinically will be able to -- will support further detection of cancers and the like.

So I just feel really good about this product and what it's doing for the Cytology business.

Okay. Then I guess sticking on this theme of cytology and HPV here. You've seen a fair bit of news on HPV self-collect, lot of the reference labs are coming out with commercialized offerings for self-collection that use competitor collection systems and I'm just curious how you guys are viewing this development. If it's a greenfield opportunity that would be nice down the road to have or if you're looking at it like necessity and that might be taking some share away from the in-office volumes that you have here.

Yes. I think at the highest level, we view this as expanding the market and getting more testing out there to women that maybe don't have access to gynecological exam and to have a speculum exam to capture the specimen appropriately. So we have partnered with some of the labs to have self-collect as well. So again, we view this as expanding the market.

Operator, I think we have time for maybe one more question.

Ladies and gentlemen, our last question comes from Puneet Souda with Leerink Partners.

Steve, Karleen, the first one -- thanks, Steve. So first one, maybe on the gantry side, I mean, 2,000 legacy units that you have out there, with the change in the commercial strategy and the actions you're taking, can you elaborate a little bit about how do you see that conversion in the last quarter here and then '26? And how should we think about maybe on an annual basis? I know Steve used to give that number for sort of Panther, but I just wanted to know on this side of the business, how do you think about these legacy gantries getting replaced?

Yes, I think we see them kind of steadily improving is the way I would keep thinking about it, Puneet, that we'll sell more this quarter than last quarter and then I think continuing to strengthen next year. Candidly, the end-of-life ones are more ones that will convert to our existing product and then Envision because these by definition, are a lot of the older ones that people hadn't upgraded or whatever had for a while and might not have been the leading adopters. And then we see Envision really kicking in on top of that later next year. really for a lot of the thought leaders and being exciting.

So I think, again, we view that our worst days in Breast Health, we had the speed bumps. But as we have both better commercial execution and the new product coming next year, feeling really good about where we're headed.

Got it. And then, I mean, if I may ask about -- again, I don't think you were expecting a USPSTF question, but the USPSTF members, as you saw, the committee has been purged and there's an expectation new members are going to come in. Just wanted to get your thoughts on the legacy assays, if there's an impact to that. Is the co-testing fully intact as a result?

And how are you thinking about this change, which sort of happened recently?

I think at the end of the day, we're looking at it as women's health and the tests that we're involved with are all going to be very important and there. And it's positive for women's health, positive for the payers and economically makes a lot of sense. So the short- term machinations and turmoil there, as you've watched USPSTF with us for years and years, doesn't have much of a quarterly impact or even an annual impact on us because of fundamentally what we're doing. So we just kind of keep our heads down.

We get the payers covered and feel good about where we're headed.

And ladies and gentlemen, that concludes today's conference call. Thank you, everyone, for your participation. You may now disconnect.