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Shares of  Hologic Inc. (HOLX - Analyst Report) slipped 1.76% to $20.11 after market-close on Feb 4 following the release of its first-quarter fiscal 2014 results. Adjusted earnings of 34 cents per share fell 10.5% from the year-ago level but beat the Zacks Consensus Estimate by 3 cents. The adjusted number also exceeded the company’s guidance range of 30–31 cents. However, on a reported basis, the company recorded loss of 2 cents per share comparing unfavorably with earnings of 1 cent per share reported in the prior-year quarter.

Revenues in Detail

Revenues were $612.4 million in the quarter, down 4.9% from the prior-year adjusted revenues (including Gen-Probe revenues) of $644.6 million.  The top line was on par with the Zacks Consensus Estimate of $612 million but edged past the company’s guidance range of $600−$610 million. However, revenues were down 3% from the year-ago reported revenues of $631 million.

In the quarter, growth in revenues was driven by strong performance in the 3D tomosynthesis and MyoSure product lines. Molecular products like Aptimawomen’s health products, Aptima HPV and cancer-related assays also performed well. Service revenues also exhibited a favorable increase. However, growth was more than offset by poor ThinPrep pap test sales in the U.S. and NovaSure sales along with poor 2D mammography system sales due to the mix shift to 3D. Unfavorable currency had a negligible impact on revenues.

Segments in Detail

The Diagnostic segment (46.7% of total revenue) was down 6.6% year over year on a reported basis and 10.5% year over year on an adjusted basis to $285.8 million in the reported quarter. The Mar 2013 divestiture of the Lifecodes business which contributed $12.6 million to the prior-year quarter’s revenues accounted primarily for the downside. Besides, interval expansion and globally lower average selling prices led to a decline in ThinPrep pap test sales in the U.S. Lastly,  lower West Nile Virus assay sales resulted in a decline in revenues from the blood screening. However, this decline was partially offset by decent performance from the molecular product line with majority of revenues coming from Aptima products sales.

Breast Health segment (36.9% of total revenue) was up 2.6% year over year to $226.5 million. Growth was driven by a 7.5% increase in service revenues from the company's increasing installed base of digital mammography systems, along with a rise in biopsy device sales. Improvement in product sales was driven by an increasing sales shift to 3D Dimensions systems from 2D Selenia and 2D Dimensions systems.

The GYN Surgical business (12.9% of total revenue) recorded revenues of $78.9 million, down 2.5% from the comparable prior-year period. The downfall was on account of lower NovaSure system sales, despite higher sales of MyoSure systems.

Revenues from Skeletal Health (3.5% of total revenue) were down 10.1% year over year to $21.3 million. The drop in revenues was due to lower sales of bone densitometry systems and mini C-arm systems.

Operational Update

Hologic’s gross margin was 62.4% in the reported quarter, up 590 basis points (bps) year over year. The margin expansion was on account of favorable product mix in the capital business related to higher 3D sales combined with higher service margins.

In the reported quarter, adjusted operating expenses amounted to $302.7 million, down 0.5% year over year. Accordingly, adjusted operating margin was 12.9%, up 450 bps year over year.

Financial Update

Hologic exited the quarter with cash and cash equivalents of $448.6 million compared with $829.4 million at the end of the same quarter previous year. Total long-term debt as on Dec 28, 2013 was $4.3 billion, down 10.4% year over year.

Guidance

The company provided its business outlook for second quarter fiscal 2014 and updated the full year guidance. For the said quarter, the company expects revenues of $605−$615 million (representing annualized decline of 1% to 2%) resulting in adjusted earnings of 32−34 cents per share. The Zacks Consensus Estimate for revenues and EPS of $609 million and 33 cents respectively, fall within the predicted range.

For the full year, the company reaffirmed its expectation to report adjusted revenues of $2,425−$2,475 million, representing a 1−3% decline over the last year. The current Zacks Consensus Estimate of $2,470 million is in line with the guidance range. However, the company tightened its adjusted EPS guidance to the range of $1.34−$1.38 from earlier range of $1.32–$1.38. The Zacks Consensus Estimate of $1.36 falls in the middle of the guidance range.

Our Take

Hologic delivered an average performance in the fiscal first quarter. Although the company is plagued by challenges like decline in revenues from the core segment and ongoing shift to 3D tomosynthesis technology, management seems to be strategically prepared to get over these challenges. The major goal of management is to sustain top- and bottom-line organic growth. The strategy is to accelerate the performance of the major growth drivers of the company, i.e. Diagnostics, Breast Health and Surgical, and establish a strong foothold globally. We believe that with products like PANTHER instrument platform, 3D tomosynthesis system and MyoSure in its portfolio, Hologic has the potential to do well.

Currently, Hologic carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the overall healthcare sector worth considering are Natus Medical Inc. (BABY - Snapshot Report), ABIOMED, Inc. (ABMD - Analyst Report) and AngioDynamics Inc. (ANGO - Analyst Report). While Natus Medical sports a Zacks Rank #1 (Strong Buy), ABIOMED and AngioDynamics carry a Zacks Rank #2 (Buy).

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