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Hologic Inc (NASDAQ:HOLX)
Q3 2019 Earnings Call
Jul 31, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day. Good afternoon, and welcome to the Hologic Incorporated Third Quarter Fiscal 2019 Earnings Conference Call. My name is Eduardo, and I am your operator for today's call. [Operator Instructions].

I would like now to introduce Mr. Mike Watts, Vice President, Investor Relations and Corporate Communications, to begin the call. Thank you.

Michael J. Watts -- VP, Investor Relations & Corporate Communications

Thank you, Eduardo. Good afternoon, and thanks for joining us for Hologic's Third Quarter Fiscal 2019 Earnings Call. With me today are Steve MacMillan, the company's Chairman, President and CEO, and Karleen Oberton, our Chief Financial Officer. Steve and Karleen both have some prepared remarks, then we'll have a question-and-answer session.

Our Third Quarter Press Release is available now on the Investors section of our website. We also will post our prepared remarks to our website shortly after we deliver them. Finally, a replay of this call will be archived through through August, 23rd.

Before we begin, I'd like to inform you that certain statements we make during this call 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 that's included in our earnings release and in our filings with the SEC.

Also during this call, we will be discussing certain non-GAAP financial measures. A reconciliation to GAAP can be found in our earnings release. Finally, any percentage changes we discuss will be on a year-over-year basis and revenue growth rates will be expressed in constant currency, unless otherwise noted.

Now I'd like to turn the call over to Steve MacMillan, Hologic's CEO.

Stephen P. MacMillan -- Chairman, CEO & President

Thank you, Mike, and good afternoon everyone. We're pleased to discuss Hologic's financial results for the third quarter of fiscal 2019, our fifth consecutive quarter of strong, consistent overall results. Total revenue of $852.4 million, and non-GAAP earnings per share of $0.63, were both above our guidance. Similar to recent periods, revenue growth was driven by our largest businesses, Molecular Diagnostics and Breast Health, and we're also happy that the performance of our Surgical Division continues to strengthen. These strong results continue the positive momentum, that started to build in our core businesses throughout 2018.

During this time, each of our divisions has made progress to varying degrees, on the four strategic levers we can pull to drive growth. Let me touch on each of these to illustrate both the progress we have made and the opportunities ahead. First, commercial execution in the United States has been our strong suit, enabled by our excellent sales teams and best-in-class products such as our Genius 3-D mammography systems, our Panther Molecular Diagnostics instrument, our ThinPrep liquid Pap test, and our MyoSure and NovaSure surgical devices.

Across these core brands, we are executing effectively, as we build on our number one market shares, maintain premium pricing, and partner with our customers to drive demand. These products are the foundation for our strategy and overall financial success. But since we already have high domestic market shares in some lower growth end markets, we need to do more to drive attractive growth. That's where the other three strategic levers come in.

To start, we have worked hard over the last several years to expand into international markets, where we have much more headroom to grow shares than we do domestically. Not long ago, some of you may recall that I described our business outside the United States as a start up or said another way, it was basically treated as an export business.

Today, thanks to strong leadership and very deliberate efforts to build our channel strength, international has emerged as a solid and consistent grower. Third, we have doubled down on innovation and revitalized our R&D pipelines to build around our core product assets. Today, after several years of significant changes in our R&D capabilities, all of our divisions of established a healthy cadence of innovation for the first time, and the results are beginning to benefit our financials. For example, sales of recently launched products totaled more than one $180 million in the third quarter. This represented about 21% of our total revenue and grew more than 40% compared to a year ago.

And fourth, to supplement our organic growth, we have announced three tuck-in acquisitions over the last year, all built around our Breast Health Core, to further diversify our revenue and enable us to operate across the continuum of patient care. Given the strength of our cash flows and balance sheet, we believe these smaller deals will be an important part of our future growth and hopefully not just in Breast Health.

With that introduction, let's discuss our third quarter results in more detail. Revenue of $852.4 million, grew 4.7% in constant currency, ahead of our expectations. Within this, the acquired Faxitron and Focal businesses contributed $12.8 million to revenue, and we are off to a good start with these deals. Excluding sales from our divested blood screening business, which declined in the third quarter, revenue of $832 million grew 5.3% in constant-currency, this was an acceleration of 30 basis points sequentially compared to our second quarter growth rate.

In terms of geography, domestic sales of $642.5 million increased a healthy 4.2% in the third quarter. Excluding our divested blood screening business again, US growth would have been 5%, accelerating for the fourth consecutive quarter. Our largest franchises, Molecular Diagnostics and Breast Health, once again led the charge as we continue to build around our Panther and Genius installed bases. Additionally, we are also pleased to see our US surgical business improve again continuing the steady progress that began early last year.

Outside the United States, sales of $209.9 million increased 6.2% in constant-currency. This was a solid performance, but growth was a little slower than in recent quarters, mainly due to macroeconomic and political challenges in our small Latin American business, which is mostly Breast Health. Excluding Latin America, OUS growth would have been about 200 basis points higher. More broadly, total Diagnostics and Surgical both grew low double-digits, outside the United States, and Medical Aesthetics returned to growth as well.

Now let me provide some more detail on our divisional revenue results. Let's start with our biggest business business, Breast Health, where underlying trends remained strong. Global Breast Health sales finished in line with our expectations in the third quarter, and totaled $325.4 million, a solid increase of 6.7% against a tough prior-year comparable. As we have said many times before, our Breast Health division today is much steadier and more diversified than it ever has been, with innovative, market-leading products across the continuum of patient care and around the globe.

In terms of geography, domestic sales drove Breast Health growth in the quarter with revenue increasing a very strong 8.9%. OUS Breast Health sales declined by 1.5%. This was driven mainly by the challenges in Latin America that I mentioned earlier, as well as the annualization of some prior-year tender wins and order timing.

In terms of sub-segments, Imaging sales grew 6.1%, while Interventional sales increased 9.5% , as we focus on selling our growing portfolio. In Imaging, sales of our Genius 3D systems increased strongly, driven by our new three dimensions and 3D performance gantries. These innovative new products have now clearly established themselves at the heart of our capital portfolio. Other new products, including Intelligent 2D, Clarity HD and SmartCurve, also contributed nicely to Imaging growth, as did revenue from our acquired Faxitron business.

In Interventional, our third quarter results benefited from our focus on portfolio selling, as well as revenue from our acquired Focal business. These positives more than offset a headwind from lower Brevera sales due to the supply constraints we have previously discussed.

Before I turn to Diagnostics, I want to spend a minute on our pending acquisition of SuperSonic Imagine or SSI, a French innovator in cart-based ultrasound technology. This tuck-in deal is very consistent with our capital deployment goals. It's fairly small at an enterprise value of roughly $85 million, and leverages our existing call points . It's also expected to be accretive to our revenue growth rate, albeit with some slight dilution to EPS, in the near-term.

We have wanted to expand in ultrasound for a while, as the technology is used across the full continuum of Breast Health patient care. We had previously done a small distribution deal to sell the Viera portable ultrasound scanner, and acquiring SuperSonic Imagine will enable us to further enter the larger cart-based market, which has been growing at a high single-digit rate. Having evaluated several targets in this space over the past few years, we believe that SSI's newest product, the Aixplorer Mach 30, represents best-in-class technology, highlighted by excellent image quality. So SSI will support our reputation for providing clinically differentiated products.

The Mach 30 is used as a supplement to mammography for screening women with dense breasts, and also to help guide biopsies and surgeries. Importantly, less than 15% of SSI's revenue is generated in the United States, which provides an excellent opportunity to leverage our strong domestic sales channel. Over time, we are hopeful that the Mach 30 can develop into a platform a bit like Genius, one that enjoys significant clinical differentiation and on to which we can layer software and hardware upgrades.

From a process perspective, we expect to purchase about 46% of SSI's shares in the next few days. This will enable us to obtain Board seats and give us a controlling interest in the company, then we will file a cash tender offer to acquire the remaining shares, and hopefully close the deal in the first quarter of our fiscal 2020.

Now let's turn to Diagnostics, where revenues of $305.4 million increased a strong 5.1% in the quarter. Excluding sales from our divested blood screening business, which declined in the quarter, diagnostics revenue increased an even better 7.1%. Molecular remains the growth driver here, based on the productivity of our R&D team, which has now earned US clearances in 11 consecutive quarters, and the sophistication of our lab and physician-based sales teams.

In the quarter, worldwide Molecular sales of $170.9 million grew 11.7%, our third consecutive quarter of double-digit constant currency growth, despite a challenging prior-year comp. Internationally Molecular grew 22.1%, well into the double-digits for the 12th time in 13 quarters. Although international is a small piece of our total Molecular franchise, we are seeing very strong performance there. And in the US, although we already enjoy high market shares in key assay categories, Molecular sales still grew 9.4%. This reflects how we work collaboratively with our customers, especially our largest ones, to drive volumes and better patient care in established testing categories.

In terms of products, Molecular growth was broad-based in the quarter, as customers consolidated testing on our large installed base of fully automated Panther instruments. Sales of our largest Aptima women's health assays for chlamydia, gonorrhea, HPV and trichomoniasis all increased solidly. In addition, although sales of new diagnostics products are still relatively small, they more than doubled in the quarter, led by our quantitative viral load tests and by Panther Fusion.

Moving on, Cytology and Perinatal sales were $120.3 million in the third quarter, a small increase of 1.3%. Cytology sales increased slightly, all outside the United States, while Perinatal sales were flat. In the United States, growth in the Cytology market remains challenged due to our high market shares and longer cervical cancer testing intervals.

Elsewhere in Diagnostics, revenue related to our divested blood screening business was higher than expected at $14.2 million, although this decreased by 23.7% compared to last year. As a reminder, this revenue mainly reflects low-margin products and services under transition agreements we have with Grifols. We expect blood screening revenue will total about $10 million in the fourth quarter, and decline further to about $30 million for our 2020 fiscal year.

Before we discuss GYN Surgical, let me mention our leadership transition in Diagnostics. As you probably know, Tom West accepted the CEO position at another company in June. We are happy for Tom, and even more excited that Kevin Thornal has succeeded him as President of our Diagnostics Division. As many of you know, Kevin led our European Breast Health turnaround a few years ago and guided Cynosure through a difficult stabilization process. He has a great track record of strengthening businesses, so he will fit well with our already-strong Diagnostics leadership team. The division is performing well today, and we believe Kevin's fresh leadership will accelerate the progress we have already made, especially in business development.

Now let's shift gears and cover GYN Surgical, where sales of $112.2 million increased 5.2%, our fastest growth in eight quarters. This continues a steady cadence of improvement under new leadership since the business bottomed in the first quarter of 2018. Thanks to a strengthening sales force, MyoSure continues to be a healthy grower and we have built on this foundation by introducing new related products such as our Fluent Fluid Management System and our Omni Hysteroscope. And we are excited that more new products are on the way, based on increased efforts in both internal development and licensing.

Now let's turn to Medical Aesthetics, where sales of $85 million represented about 10% of consolidated revenue and declined 5.5%. Despite this decline, we saw additional signs of improvement for the second consecutive quarter. Our US sales force stabilized and posted its 3rd consecutive quarter of sequential growth under the leadership of Eric Anderson, who has now replaced Kevin as President of the Division. And OUS sales grew at a low single-digit rate after four consecutive quarters of declines. So while we still have a long way to go at Cynosure, we believe we are beginning to find our footing.

To round out the revenue discussion briefly, Skeletal sales of $24.4 million grew 9.8% based on solid growth of our DEXA systems for bone density and body composition testing. So to wrap up, our quarter results represent our 5th consecutive quarter building on our market leading brands in the United States, especially in Breast Health and Diagnostics. We are expanding internationally, churning out new products from our revitalized R&D pipelines, and effectively integrating tuck-in acquisitions while looking for more.

Overall, we are executing well, but know that we have many more opportunities still ahead of us, which gives us confidence in our future.

Now let me turn the call over to Karleen.

Karleen M. Oberton -- CFO

Thank you, Steve and good afternoon everyone. In my remarks today, I'm going to walk through the rest of our 3rd quarter income statement, touch on a few other key financial metrics, then finish with our updated financial guidance for 2019 as well as the 4th quarter.

Unless otherwise noted, my remarks will focus on non-GAAP results and percentage changes will be on a year-over-year basis in constant currency. As Steve described, we are pleased with our 3rd quarter results as revenue of $852.4 million and EPS of $0.63 exceeded our guidance. We benefited from strong performance by our largest businesses, Breast Health and Molecular Diagnostics, as well as improved results in our Surgical Division. Both operating and net margins improved, reversing recent trends. We also deployed capital in accordance with our strategic priorities by agreeing to acquire SuperSonic and by repurchasing 50 million of stock. Our overall performance has been very solid through three quarters of the fiscal year, and as a result we are tweaking our financial guidance upward despite an incremental foreign exchange headwind.

With that introduction let me start by reviewing our P&L for the 3rd quarter. Gross margins at 61.6% decreased 100 basis points compared to the prior-year period. This is primarily due to the strong US dollar, trade tariffs in China, product sales mix, especially related to Cynosure's performance, and increased service costs. Compared to the second quarter of 2019 however, gross margins did improve sequentially by about 60 basis points, as some of the one-time headwinds we mentioned last quarter dissipated, fut the FX headwind got worse. Looking ahead, we expect better margins in the 4th quarter due to improved product mix, absorption benefits, the ramp of new product sales and our ongoing cost reduction efforts.

Moving on, total operating expenses of $276.4 million decreased 0.9% in the 3rd quarter. However, excluding Faxitron and Focal, operating expenses declined 3.9% reflecting strong expense discipline especially in G&A. But as Steve said, we remain fully committed to funding internal innovation and our R&D pipeline has never been more productive than it is today.

Based on improvements in the top line and strong operating discipline, operating margin of 29.2% increased by 40 basis points in the third quarter. Operating margin also improved sequentially to our best level since the first quarter of 2018. Other expenses net totaled $28.8 million in the 3rd quarter, 11% less than a year ago, as benefits from our currency hedges weighed higher interest expense. Given the strengthening US dollar, we expect similar hedge gains in the 4th quarter. Our currency hedges will reset as we move into 2020, theoretically eliminating any gains if currencies stay constant.

Finally, net margin of 20.1% increased 80 basis points compared to the prior-year period. Our best result since the first quarter of 2017. In addition to better operating margins and lower other expenses, we also had a slightly lower effective tax rate. Overall, our net profitability remains very healthy. All this led to non-GAAP net income of $171.6 million in the 3rd quarter, and non-GAAP earnings per share of $0.63, which exceeded our guidance.

Now I'll quickly touch on a few other financial metrics. In the 3rd quarter, we repurchased 1.1 million shares of our stock for $50 million, helping reduce our shares outstanding and boosting EPS. As of quarter end, we had a little more than $210 million remaining on our buyback authorization. Since 2016, we have put our strong cash flows to work buying back more than 24.6 million shares of stock for $926 million, which has been a great investment in use of our capital. This doesn't even include the cash we used to retire convertible debt that was in the money.

As we clean up our balance sheet, we also lowered our overall leverage ratio, which stood at 2.5 times at the end of the 3rd quarter. We remain comfortable around this level, recognizing that the ratio could fluctuate based on the timing of acquisitions and buyback activity. Finally, we generated $138 million of free cash flow in the 3rd quarter, our strongest cash flow enables us to simultaneously pursue tuck-in acquisitions while also acting on our share repurchase authorization.

Now I'd like to shift gears and discuss our non-GAAP financial guidance for the full year and 4th quarter. As a reminder, our updated guidance does not include the impact of our pending acquisition of SuperSonic Imagine. Based on our good 3rd quarter results, we are increasing our constant currency revenue guidance slightly and raising the low end of our EPS forecast. Let's start with revenue. As a reminder, we previously guided to sales of $3.325 billion to $3.345 billion, which represented constant currency growth of between 4.3% and 4.9%. Based on our 3rd quarter results, we are increasing our revenue guidance to $3.335 billion to $3.350 billion, which includes approximately $50 million of revenue from our divested blood screening business.

Based on recent exchange rates, our new revenue guidance translates into constant currency growth of 4.7% to 5.2%. This is better than our last forecast, and much better than our initial 2019 guidance, which called for growth of 2.8% to 4.2%. For modeling purposes, let me remind you that US dollar has strengthened materially compared to our prior fiscal year. In fact, based on recent exchange rates, we estimate the currency fluctuations will reduce reported revenue by roughly $36 million in fiscal 2019. This is an incremental headwind of more than $5 million relative to our previous guidance.

Despite this, we feel confident about growth in our core businesses and our ability to control expenses. As a result, we are raising the low end of our EPS guidance slightly. We now expect EPS of $2.42 to $2.44 for the year, which represents reported growth of between 8.5% and 9.4%. This is better than our initial 2019 EPS guidance, which was $2.38 to $2.42, even as we have absorbed the net effect of a worsening currency headwind and made reinvestments for future growth. This updated full-year guidance is based on diluted shares outstanding of about 272 million shares, and an effective tax rate of approximately 22%.

With only one quarter remaining in our fiscal year, this annual guidance implies revenue of $834 million to $849 million in the 4th quarter. Compared to the prior-year period, this reflects growth of 3.5% to 5.3% on a constant currency basis. On a reported basis, our guidance reflects revenue growth of 2.5% to 4.4%. On the bottom line we expect EPS of $0.64 to $0.66 in the fourth quarter, which implies very strong growth of between 10.3% and 13.8%. Obviously this is higher quarterly EPS growth earlier in the year just based on the timing of revenue and expenses.

As a reminder, our fourth quarter of 2018-2019 has one fewer selling days in the prior year period, although this occurred over the Independence Day holiday, so we don't expect a significant impact. Also recall that Medical Aesthetics revenue is always seasonally weaker in the summer months. And finally, as Steve mentioned, we expect blood screening revenue to decline from the third quarter level. As you update your forecasts, we encourage you to model at the middle of our guidance ranges, as we've tried to set realistic ranges that incorporate recent foreign exchange rates as well as potential upsides and downsides.

Before we open the call for questions. Let me conclude by saying that we are pleased with our performance in the third quarter of 2019. With Molecular Diagnostics and Breast Health driving solid growth and Surgical strengthening. These businesses, along with our international franchises, are well-positioned to drive future growth given the strategies we have in place. Both operating and net margins improved in the quarter and we continue to put our strong cash flows to work through tuck-in acquisitions and share repurchases. Based on all this, we are raising our annual revenue and EPS guidance slightly.

With that, I will ask the operator to open the call for questions. Please limit your questions to one plus a related follow-up and then return to the queue. Operator, we are ready for the first question.

Questions and Answers:

Operator

All right we will take our first question from Vijay Kumar from Evercore ISI. Please go ahead.

Vijay Kumar -- Evercore ISI -- Analyst

Hey guys, Nice quarter here, congratulations Stephen. And I just have two quick ones, Steve. Maybe one on, maybe I'll start with the Breast Health, right? This really was strong. I'm just curious on what drove this. capex environment seems to be really strong. So with this, was this more of the strong capex environment that you're seeing? Or you had some FDA regulation on dense breast, are you seeing some uplift out from that? And maybe you could comment on how the order book is shaping up on the Breast Health side?

Stephen P. MacMillan -- Chairman, CEO & President

Sure Vijay. I think the capital -- certainly capital spending looks pretty good in hospitals right now. We continue to feel good about that. I do think the 3D, it's hard to put an exact number on what the breast density legislation is, but we are certainly able to have conversations that nobody else can with the customers as they are gearing up to to make purchases. And just as a reminder for people, we are the only 3D that has an FDA indication approved for dense breasts, and there is more and more legislation driving toward disclosing breast density, it clearly plays to our advantage. So I think we feel like we've been certainly winning, and we're on the leading edge of the technology there. So it's just a good place to be in our teams continue to get better and better at really selling the overall value proposition that comes with the best product in the market. To your second piece on the order trends, we don't get too far ahead, but I would say orders continue to look good for us.

Karleen M. Oberton -- CFO

Now, I would just add kind of being on the gantry activity in the capital environment, I think our teams are continuing to come up, building that capabilities and selling the portfolio of products as well as continuing growth in our service revenue.

Vijay Kumar -- Evercore ISI -- Analyst

Could you just add on to that, Steve. If you piece in all the different elements, for execution has gotten better. It was, good to see some of the laggers, Aesthetics and GYN, turned the corner and you layer on the the tuck-in deals that you've done which will, which will annualize next year, are we now at a place for whole logic and lay claim to being a mid-single growth asset? Thank you.

Stephen P. MacMillan -- Chairman, CEO & President

Sure, Vijay. I think we feel really good when you consider Pete Valenti, we were with him. Obviously he's been running our Breast Health business for five years right now, and he's reminding us that the first strategic plan inherited, it showed the traditional old days of a growth curve and it would have been a decelerating, or really a declining business in 2018, 2019. I want to get -- we want to be careful not to get too far ahead of ourselves on exactly where we are. We want to just keep putting numbers on the board.

I think candidly, we were trying to chase some numbers a few years ago and I think we've got a little ahead of ourselves trying to proclaim where we are. I think at the end of the day, let the numbers keep speaking for themselves, and getting back to strong execution in our markets, and I think we will show where we, where we sit there. So thank you.

Vijay Kumar -- Evercore ISI -- Analyst

Thanks guys.

Operator

[Operator Instructions] We now take our next question from Doug Schenkel from Cowen, please go ahead.

Doug Schenkel -- Cowen & Co. -- Analyst

Hey, good afternoon. This is Chris on for Doug today. Thanks for taking my questions. Steve, in your prepared remarks, you mentioned that customers are consolidating Molecular Diagnostics assays onto Panther and that this has been a driver of growth. Could you just elaborate a bit more on that comment? Specifically are customers consolidating women's health and virology assays onto Panther?

Stephen P. MacMillan -- Chairman, CEO & President

Sure, it's bits of both. Primarily it's just continuing to expand our growing women's health assays. As we mentioned, we've had 11 straight quarters of FDA clearances in the United States. And I'd say, truthfully, it's probably a little bit more of still getting more women's health stuff as the women's health line has expanded, and to some degree certainly the virology kicking in. But yes, I think the way to think about our Panthers and the assays, it's sort of this wonderful gift that keeps giving. Every quarter we keep placing more Panthers in the labs, and then every quarter each Panther that we have is generally doing more revenue. So we have sort of a force multiplier here of more of an installed base, and then more menu coming through, and it's a combination of more of the women's health plus some virals and just really continuing to build and that's what's driving -- you've got almost 9.5% growth in the United States where it's pretty strong market shares already.

Karleen M. Oberton -- CFO

Yes. And I would just add to what Stephen said, the elements the he talked about, the ability to add menu on the Panther is also the value proposition for our customers that as we expand our menu, they get more leverage out of Panther and I think that's a lot of what we're seeing is the value, the customer seeing in the Panther.

Doug Schenkel -- Cowen & Co. -- Analyst

Okay. Can I just go back to revenue guidance? You beat fiscal Q3 revenue guidance by about $20 million. But you only increased full year guidance by about 7 to 8. It looks like FX is an incremental $5 million headwind. So this would imply that you reduced underlying full year guidance by about $5 to $10 million. So could you just help us bridge the revenue guidance a bit more? Thank you.

Karleen M. Oberton -- CFO

So I might just look at it a little different way. If you looked at our second half of the year guidance from our last guide, we're at the midpoint to where we are now. It has increased overall for the second half of the year, while absorbing the incremental FX. So again, I think the original guidance Q3 that we gave a prior quarter would indicate an extremely high fourth quarter. We're pleased with how Q3 went, and pleased that overall we've raised the second half of the year revenue guide.

Doug Schenkel -- Cowen & Co. -- Analyst

Okay, thank you.

Operator

We'll now take our next question from Raj Denhoy from Jefferies. Please go ahead.

Raj Denhoy -- Jefferies -- Analyst

Thanks, Anthony in for Raj, maybe just a couple on the super S deal, and maybe just a little bit more detail on expected revenue contribution next year, and maybe a little bit on the growth profile of that asset and just the underlying margin profile of that business as we move into fiscal 2020. And then I'll have a quick follow-up in Diagnostics. Thanks.

Stephen P. MacMillan -- Chairman, CEO & President

Sure, Anthony. Until we close that deal, we're going to avoid getting too far into the, into the details. But we think generally they did about in the high 20-ish million dollars in revenue in 2018 and it's growing at what looks to be a low double-digit rate. So, as we consolidate that, and ultimately once we close on the deal, we'll give a little more information. But I think as we're thinking about it, the highest level, it will drop in 30-ish plus million of revenue at some point, we don't have it, we won't have, it probably fully closed until our first quarter, as we talked about. But feel really good about its underlying growth rate, and frankly the technology itself. And as a big reminder, most of their revenue right now is outside the United States. So it brings us nice revenue there and our US sales force is chomping at the bit to get their hands on it. So we think it'll be a clear double-digit grower of an exciting new product for us.

Raj Denhoy -- Jefferies -- Analyst

That's very helpful. And just on Diagnostics, maybe just a little bit on the share front. So it certainly sounds that volumes are doing well on the Molecular side, but anything on share, just when you consider a number of recent launches from competitors out there, whether it be in Europe in the US? Thanks again.

Stephen P. MacMillan -- Chairman, CEO & President

Yes, I think the way we think about share is our international Molecular business grew 22%, our US business grew over 9%. I think we will stack that up with pretty much anybody and ergo I think we're probably growing faster than the market, without knowing specific shares.

Michael J. Watts -- VP, Investor Relations & Corporate Communications

Yes, it's Mike, Anthony. I think despite those very high shares in most of the key categories, I think what the team has done a really good job of doing is working with our customers to drive underlying demand and drive testing the guidelines in those kind of things. So that's helped us grow the business, even though their shares were already pretty high.

Raj Denhoy -- Jefferies -- Analyst

Thanks.

Stephen P. MacMillan -- Chairman, CEO & President

Thanks, Anthony.

Operator

We'll take our next question from Tycho Peterson from JP JPMorgan. Please go ahead.

Tycho Peterson -- J.P. Morgan -- Analyst

Thanks, Steve, GYN Surgical, you commented, steady progress in the US. Can you just touch on NovaSure and MyoSure? I didn't hear you break those out.

Stephen P. MacMillan -- Chairman, CEO & President

Sure, Tycho. I think MyoSure continues to be really strong, and I think we stopped giving the the individual piece. I think the way I think about it. is MyoSure was still a clearly double-digit grower. feeling great about it. NovaSure still declining in that probably high-singles level. We'd like it to be a little bit better. But overall, love the trajectory of the business. And as a reminder, we've introduced some new products there as well between our new fluid management system, which is called Fluent, and the new Omni hysteroscope, and those are clearly those are related to MyoSure and are clearly helping drive growth as well.

Tycho Peterson -- J.P. Morgan -- Analyst

And then on SSI, a couple of couple of things. You've got the Clarius deal that you had before for distribution, curious how those fit together. And then obviously the cart-based system get used in a lot of markets -- vascular, gastroenterology, other areas. So I'm curious about how you're thinking about some of those kind of non-mammography based areas?

Stephen P. MacMillan -- Chairman, CEO & President

Sure. Our focus is clearly going to be just in the mammography space. So if there's opportunities beyond that, we could always partner that or whatever. With the technology, but our clear focus will be in the Breast area, and I think it's compatible with Viera, so we'll now have both a portable as well as a cart-based option. And frankly I think to a large degree the cart-based options are going to be the bigger drivers of revenue here. So I think we've been learning more and more about the space and excited to have the chance to really get a cart-based offering that we hadn't had.

Michael J. Watts -- VP, Investor Relations & Corporate Communications

Thanks, Tycho.

Tycho Peterson -- J.P. Morgan -- Analyst

Okay, thanks.

Operator

We'll now take our next question from Jack Meehan from Barclays. Please go ahead.

Jack Meehan -- Barclays Capital -- Analyst

Thank you. Good afternoon. I want to go back to the Breast Health segment. Just when modeling, how much was the contribution from Focal and Faxitron in the quarter? If you could break that out. And was also curious the international commentary around Latin America, just a little bit more color on that and whether -- do you think that's resolved going in the fourth quarter, or does the fourth quarter guidance assume that stays pressured?

Karleen M. Oberton -- CFO

Jack, it's Karleen. So I think from an -- Focal and Faxitron, I think we indicated it contributed just under $13 million of revenue in the quarter. We think about international, LatAm is clearly the smallest piece of the Breast Health business, but it was down almost 50% and while we've guided well, our guidance assumes a little bit of improvement in Q4 for that business, and it will be down as well year-over-year. And I think just in general international Breast Health, we did see some movement of orders from Q3 to Q4, as well as, again, in the prior-year period, we've had some large tenders that obviously didn't repeat this year.

Jack Meehan -- Barclays Capital -- Analyst

Great, and then one more follow-up on Breast Health. If I look at the service revenue in the quarter just from the queue, the $117 million, it looks like that was up about 1% year-over-year. So that's slowed down, I'm just curious if there is anything to call out related to that and maybe just give us an update in terms of some of the software upgrades and service and just where you think you are in the cycle.

Karleen M. Oberton -- CFO

Yes, I think, again, I think the expectations on service growth is in line with what we see. I think one of the nuances here is as we place new gantries, we have the cycle where customers will go under warranty for a year period, and we have a lapse of the service contract revenue until they reup, so that low single-digit growth is kind of what we expect.

Operator

We will now take our next question from Dan Leonard from Deutsche Bank. Please go ahead.

Dan Leonard -- Deutsche Bank -- Analyst

Thank you. A couple for Karleen. Karleen, on gross margin, was there any downside variance in the quarter, besides foreign currency, and if so, what was the driver?

Karleen M. Oberton -- CFO

Yes, yeah, I would say beyond the foreign currency and the tariffs, the other was mix, and specifically in Cynosure. So if you think about Q3 last year, it was what I call the height of the women's health product from a comp perspective, which those products had a higher gross margin portfolio, profile than the rest of the Cynosure business. I would say that was the second-biggest driver, and then obviously we mentioned some higher service costs.

Dan Leonard -- Deutsche Bank -- Analyst

Okay. And I was specifically trying to focus on downside versus plan, as opposed to year-over-year. Is it still the objective, I mean you previously thought gross margins will be only slightly down year-on-year in 2019. And it looks like it will be down well more than that. Could you address that variance? And also, talk about being able to defend the gross margin line going forward?

Karleen M. Oberton -- CFO

Yes. So I think from our original guide and what we had talked about for margins, I think that one of the biggest drivers is the increasing strengthening US dollar, which has impacted the gross margin line. I think, coupled with what I've mentioned last quarter -- so last quarter we had talked about a number of one-time items, but what is continuing here as well as some higher service costs that we do have teams focused on to improve. But I think what's also equally important is that when you look at our operating income margin and net margin have both improved despite the headwinds we're facing with gross margin, which leads to our ability to have strong discipline, and our operating expenses still drive results.

Dan Leonard -- Deutsche Bank -- Analyst

Okay, thank you.

Operator

We'll now our next question from Bill Quirk from Piper Jaffray. Please go ahead.

Analyst

Great, thanks. This is Dan on for Bill. I appreciate your comments on utilization within Panther instruments. It sounds like you're working well with customers to drive that figure. How are you thinking about that going forward in terms of utilization? It sounds like at the growing figure. Thanks.

Michael J. Watts -- VP, Investor Relations & Corporate Communications

Hey Dan, it's Mike. Yes, we try to update that number of formally at the end of our fiscal year, so I probably don't want to give you a specific number, but I mean, your intuition is right. I mean that's generally been growing kind of in the high single-digit range year-over-year, that being Panther utilization per box. So some good progress there.

Analyst

Okay, great, thanks. And then just another one on Molecular to follow up. There's another double-digit quarter, and then how are you guys thinking about that growth rate heading into the fourth quarter, and then maybe over the longer term? I know you've said high single-digits But it's been pretty consistently outperforming. So if you just touch on that. Thank you.

Stephen P. MacMillan -- Chairman, CEO & President

Yes, I think we continue to think about it as a high singles probably lower end of high singles and plan for that and try to deliver a little bit better, certainly helps, but we wouldn't be ready to call it a long-term double-digit growth, especially with the competitive environment and everything else, but feel like we're doing very well there.

Analyst

Okay, great, thanks.

Operator

Will now take our next question from Derik de Bruin from Bank of America Merrill Lynch. Thank you.

Analyst

Hi, this is Abby on for Derik today. Thank you for taking my question. So I have one on SSI and have a follow-up on Cynosure. So I know SSI is targeting EBITDA breakeven for the year. I understand that you wanted to be more conservative and guided to slight dilutive for next year. So I just wanted to see if there is any additional color or consideration there. Thanks.

Stephen P. MacMillan -- Chairman, CEO & President

Well, when we bring it into us, we report net income, not EBITDA. So while they may be breakeven on an EBITDA basis, they're losing money on an operating basis. So that's the difference there. And obviously [Indecipherable].

Karleen M. Oberton -- CFO

Yes, I don't think is on -- I think we've changed strategically kind of investments are kind of spend habits that they had. It's just, as Steve pointed out, a different, different profitability metric.

Stephen P. MacMillan -- Chairman, CEO & President

And I think I've -- just to remind you, I think what we said in our original press release there, that was the expectation would be I think less than 1% dilutive for next year. So we think that's very manageable in the context of the overall P&L.

Michael J. Watts -- VP, Investor Relations & Corporate Communications

And we'll probably be in a position when we give guidance for next year to be able to incorporate that in on the next call.

Analyst

Sounds good, thank you. And for Cynosure, congrats on the launch for the new contouring products recently. Any updated thoughts on the outlook for the segment for rest of the year and next year?

Stephen P. MacMillan -- Chairman, CEO & President

Go ahead. Karleen.

Karleen M. Oberton -- CFO

I was just going to say that I think as we looked, we are happy with the stabilization. We're really pleased that we're able to launch some new products, although I don't think they're going to be big meaningful drivers of the growth unless we create some excitement with the sales force. I think as we exit the year, we expect the dividend to return to growth. But, albeit on a much weaker [Indecipherable]. So I feel good about where we're at right now.

Analyst

Great, thank you.

Operator

We'll now we'll take our next question from David Lewis from Morgan Stanley. Please go ahead.

David Lewis -- Morgan Stanley -- Analyst

This is Mason on for David today. Thanks for taking the question. I wanted to touch on Surgical, you have a new competitor coming to the market with Serene. I was just wondering if you could talk about how you think about the competitive dynamics with this segment moving forward with NovaSure and into next fiscal year? Thanks.

Michael J. Watts -- VP, Investor Relations & Corporate Communications

Sure Mason, yeah, I think we continue to feel good about the direction and the results that we're generating. We've looked at the clinical package for Serene. As you may know, there's a lot of questions around that company and business and a lot of stuff going on over there. So we just keep focusing on our customers and our innovation and feel good about where we're going.

David Lewis -- Morgan Stanley -- Analyst

Thanks and on the Brevera supply constraints, you referenced this as weighing in Interventional results in the quarter. I was wondering if you could potentially break that out and potentially provide an update as to when you expect to be back to full supply? Thanks very much.

Stephen P. MacMillan -- Chairman, CEO & President

Yeah, we're not going to get into -- the level of impact is fairly small in the grand scheme, but I think as we've said, we probably really won't be back in the full supply and later on in 2021 or fiscal '20 rather, at the end of our next fiscal year.

David Lewis -- Morgan Stanley -- Analyst

Great, thanks very much.

Michael J. Watts -- VP, Investor Relations & Corporate Communications

Great.

Operator

I'll take our next question from Richard Newitter from SVP Leerink. Please go ahead.

Richard Newitter -- SVB Leerink -- Analyst

Hi, this is Jaime on for, Rich. A quick question, so I didn't think I heard you break out any other sub-segment directional commentary on growth within Medical Aesthetics. So I was wondering if you could provide any sort of commentary on the different trends between skin, body and women's health?

Stephen P. MacMillan -- Chairman, CEO & President

At the end of the day, we're not providing the breakouts per se, given the size of the business. But overall I'll tell you skin was up nicely, women's health was down significantly over last year, because that it was a little at 12 months ago, almost to the day when the FDA letter came out. So we were doing very well with the women's health line last year at this time and the body segment is down a bit.

Richard Newitter -- SVB Leerink -- Analyst

Okay, great. And then just within the US you're saying that you saw some sequential improvement there. So just curious, you guys had mentioned some marketing initiatives that were launched at the beginning of last quarter, just wondering if some of that is coming from the strength of those marketing initiatives? Thanks for taking my questions.

Stephen P. MacMillan -- Chairman, CEO & President

Yeah, I think it's coming from two things. We feel really good, in particular, about the Brooke Shields campaign, that we have on SculpSure, there's been a lot of positives on that. And the sales force has really hit a good spot now, where we've got a combination of some great seasoned veterans and frankly most of the leadership of the sales organization are the long-term veterans of the company, the Cynosure pre-, before we acquired it, supplemented now with a lot of great teams on the ground. So it's a combination really of the marketing and the teams in place, and then we're really focused on bringing a pipeline of new products that will start to kick in over next year.

Operator

We will now take our last question from Daniel Brennan from UBS. Please go ahead .

Daniel Brennan -- UBS -- Analyst

Great, thanks. Thanks Steve, Karleen, and Mike. I guess I wanted to ask the first question on Breast. If you don't mind, could you just walk us through a little bit about the strength that you're seeing there and kind of segment out kind of the contribution, or how we should think about Genius versus the new agantries dimensions and profile. Just wondering what the runway is on each of those to sustain this type of growth rate.

Stephen P. MacMillan -- Chairman, CEO & President

Sure. I think overall, really the 3Dimensions and 3D Pperformance of by far become the bulk of the sale now. So the old days of Dimensions-3000, 6000, 9000-have largely given way to the 3D Performance and the 3Dimensions still under the Genius banner. But I think the new products, both high-end and a slightly more performance, is slightly featured on the 3D Performance, both providing us really good opportunities to both go high-end and also the lower-end with our customers.

Karleen M. Oberton -- CFO

And I would just add from a runway perspective, I think we've talked about the overall market penetration from 2D to 3D was our own installed base would give us roughly 3,000 to 6,000 more gantries to convert to 3D, with I'd say a steady cadence of gantry placement since 2015, about 1,000 per year. That gives us that it gives us a nice runway.

Daniel Brennan -- UBS -- Analyst

And then, and thanks for that. And then just one final one, just on the M&A front, it sounds like tuck-ins are the kind of focus going forward. But just wondering Steve, just remind us, to the extent like you were to see something bigger, like what's your appetite in terms of size, and maybe any color on the pipeline as it stand today. Thanks a lot.

Stephen P. MacMillan -- Chairman, CEO & President

Sure, Dan. I think we're, while not a stated policy, we're generally thinking, OK, we're generating $600 million to $700 million of free cash a year. Probably not thinking about spending more than that in any given year on acquisitions. I think it's kind of a good discipline. So that's not a formal policy, never to be deviated from, but I think it should frame in kind of the thinking, and I think we're certainly hunting much more in the hundred, a couple of hundred million kind of range, versus anything that starts with a B. Thank you.

Operator

Thank you. That's all the time we have for questions today. This now concludes Hologic's Third Quarter Fiscal 2019 Earnings Call. Have a good evening

Duration: 55 minutes

Call participants:

Michael J. Watts -- VP, Investor Relations & Corporate Communications

Stephen P. MacMillan -- Chairman, CEO & President

Karleen M. Oberton -- CFO

Vijay Kumar -- Evercore ISI -- Analyst

Doug Schenkel -- Cowen & Co. -- Analyst

Raj Denhoy -- Jefferies -- Analyst

Tycho Peterson -- J.P. Morgan -- Analyst

Jack Meehan -- Barclays Capital -- Analyst

Dan Leonard -- Deutsche Bank -- Analyst

Analyst

David Lewis -- Morgan Stanley -- Analyst

Richard Newitter -- SVB Leerink -- Analyst

Daniel Brennan -- UBS -- Analyst

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