Good afternoon. And welcome to the Hologic's First Quarter Fiscal 2025 Earnings Conference Call. My name is Lisa, and I'm your operator for today's call. Today's conference is being recorded. All lines have been placed on mute. I would now like to introduce Mike Watts, Corporate Vice President, Investor Relations, to begin the call. Go ahead, sir.

Thank you, Lisa. Good afternoon. And thank you for joining Hologic's first 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 first quarter press release is available now on the Investors section of our Web site. We will also post our prepared remarks to our Web site shortly after we deliver them, and a replay of this call will be available on our Web site for the next 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 that's 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 of acquired businesses owned by Hologic for less than one year. Also, organic revenue, excluding COVID-19, which further excludes COVID-19 assay revenue, other revenue related to COVID-19 and sales from discontinued products in Diagnostics. Finally, any percentage changes 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.

Good afternoon, everyone. I'd like to begin today by welcoming Mike back to the Hologic team. We are all excited to have him back. And now we are pleased to discuss our financial results for the first quarter of fiscal 2025. As we pre-announced last month, total revenue for the quarter was $1.022 billion, an increase of 1% on a constant currency basis. This was in line with our guidance as the stronger dollar subtracted about $9 million from reported revenue since we guided in early November. Non-GAAP earnings per share were $1.03 at the high end of our guidance range and an increase of 5%. This reflected strong improvement in non-GAAP operating margins of 90 basis points as well as share buybacks and benefits of our foreign exchange hedging program. In my remarks today, I'd like to revisit some of the themes from our presentation at the JP Morgan conference last month. In that discussion, we reflected back on Hologic's strong financial performance since 2014. Our main point, however, was not about the past, it was that we believe we can continue to grow revenue and earnings at similar rates in the future. Why do we believe that? Because of our market leading products and the strong organizational capabilities we have steadily built around them. To be more specific, from 2014 through 2024 Hologic grew revenue from about $2.5 billion to more than $4 billion. This represented a compound annual growth rate of 4.8%, including all our acquisitions and divestitures along the way. Over the same period, non-GAAP earnings per share increased from $1.46 to $4.08, representing a CAGR of 10.8%, more than double the rate of sales growth. At JP Morgan, our primary message was that we believe we can continue to grow earnings at a double digit…

Thank you, Steve. And good afternoon, everyone. In my remarks today, I will first review our divisional revenue performance in the first quarter. Then I'll provide a little color on Gynesonics, a tuck-in acquisition we recently closed in our Surgical business that we are excited about. As Steve said, we met our revenue guidance on a constant currency basis in the first quarter growing 1%. At the highest level, we outperformed in diagnostics but lagged in Breast health. Surgical and Skeletal were roughly in line with our expectations. Our Diagnostics business continues to be one of the best performing diversified asset in the space and Q1 was another strong quarter. Revenue of $470.6 million grew 5.2% and 9.1% organically excluding COVID. Growth for the division continues to be led by molecular diagnostics, which grew 6.7% or 11% excluding COVID. Within molecular, our Biotheranostics lab testing business continued to grow at a healthy double digit rate and our BV CV/TV assay also had another outstanding quarter of strong double digit growth. We believe we are only in the middle innings of realizing the total opportunity for this test. For example, we have just begun using our physician sales force to expand the vaginitis testing market in the US, leveraging the same playbook we have used to grow our legacy women's health test. Our core women's health assays that run on our automated Panther platform also had a strong performance in the quarter. We often get investor questions about competition in diagnostics. So I want to be clear that these assays have held leading market positions for some time and our sales force continues to win new business and grow that share despite an always competitive environment. Although respiratory testing is a relatively small piece of our business, it is seasonal and…

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 Q2 and the full year. Let me begin by saying we are pleased to grow non-GAAP earnings per share by 5% this quarter when revenue only grew 1%. Although we clearly want revenue to grow faster and we believe it will, this demonstrates the substantial operating leverage we can generate and gives us confidence that we can grow earnings at a double digit rate over time. So how did we do that in the first quarter? Start, non-GAAP gross margin of 61.6% increased 80 basis points. This margin expansion was primarily the result of favorable product mix and operating efficiencies. Moving down the P&L. First quarter operating expenses of $329 million increased approximately 0.5%. As a reminder, Q1 usually represents our highest level of operating expense for the year due to several large commercial initiatives. Despite this, the year-over-year increase was driven by the addition of Endomagnetics. Excluding Endomagnetics, operating expenses would have decreased 2.3%. First quarter operating margin finished at 29.4%, representing an increase of 90 basis points. This operating margin expansion came primarily from drop through of our higher gross margin and good expense control. As Steve said, leveraging the P&L to drive modest margin expansion from already best-in-class level and strong EPS growth remains a key focus. Below operating income, other income net loss in our fiscal first quarter by slightly more than $4 million. This result was better than expected due to the benefit of our foreign exchange hedging program. As a reminder, this hedging program seeks to minimize the negative or positive bottom line impact of currency…

[Operator Instructions] We'll take our first question from Patrick Donnelly with Citi.

Steve, maybe starting on the gantry side, not surprisingly, you've obviously lived through a lot of different CapEx cycles on the hospital side. Maybe just take us through what you're seeing there? How much of it is again, maybe a little bit of a pause before the product launch? Just the right way to think about that piece as that number came down a little bit, just wanted to talk through that?

Well, why don't we try to put it into context. I think where we really frankly missed the boat a little bit was when we had three quarters in a row of 27% plus Breast Health growth in the late '23 and into early '24 period, that was really a bolus that made the market bigger during that time period than what the long term trend is. It's a little bit like even Surgical had a couple of great orders coming out of COVID, and Breast Health had the same thing coming out of chip. So we had that year -- '23, we grew at 17% plus for the full year, grew another 6% on top of that last year. And I think instead of really going back and looking at the longer term trend of the market, we were just building on top of that. So the long term trend of the market is clearly below what it was in 2023. Now I think what we're seeing this particular year is the total market, therefore, is probably going to be down a little bit, just as we saw in some of the other businesses kind of post COVID, we'll see the same for chips, combined with the fact that we've got a new gantry on deck. So I think the positive as we look at it is probably going to be a down market this year for the overall market globally but we've got something on the horizon that I think will both reaccelerate the market in '26 as well as reaccelerate our business. So that hopefully frames it in some good context. So I think it's more cyclical clearly. And you know that we've got a long track record of being able to call out either cyclical or structural issues usually with pretty good accuracy. So I think this one is very clearly a little cyclical.

And then maybe one on the diagnostics side, helpful to perhaps some more color on the script there on just what you're seeing on the competitive side. We get some questions there, clearly you do as well. Any changes there, whether it's BV CV/TV or other parts of the portfolio that the competitive landscape has changed at all? And then just curious when we think about the growth outlook there, the key thing in the pipeline we should be focusing on that could supplement the growth as we move forward here?

Good job, Patrick, working several questions into your one follow-up. So kudos to you. So high level, I can't tell you how excited we are about our Diagnostics business. And what we said when we went into COVID by placing all the Panthers around the world and even as we saw the ups and downs, as Omicron, Delta, everything else was hitting, we just systematically got stronger in terms of our Panther placements and then rolling out the menu of particularly BV, CV, where we've rolled out a new assay and then we've created the market. And we're still, as Essex mentioned, we're still in the mid-innings at most as it relates to the BV, CV opportunity. And I think when you look at our molecular business and you add in Biotheranostics, I don't think I've ever been more excited about where this Diagnostics business is going, particularly in a world where there's a lot of noise, as you well know, in the diagnostic space right now. And the way we try to look at it is that core molecular lab channel are we winning or losing, and we feel really good about our position as we as we build out from there. And then we've still got the international opportunities on top of it all and still a lot of growth in Biotheranostics as well. So Karleen?

I would just add on to that as far as -- but I'll call our special sauce in our molecular diagnostics that physician sales force where we really partner with our lab customers to promote guidelines. And I think as we said in our prepared remarks, we're just starting now with BV, CV. So that's what gives us confidence that there's still runway for growth for that new assay.

We'll move to our next question from Anthony Petrone with Mizuho Group.

Maybe a high level one, just for the long term sort of medium term financial outlook. I mean Steve and/or Essex. When you think about that mid-single digit sort of profile, I think -- and we look at the last time that range was out there was 5% to 7% and we're trending here, obviously, in the low single digits right now. We're in a low point of a cyclical gantry cycle here. What sort of gets you back to 5% to 7%, how long do you think that will take and what amount of that will come organically versus inorganically? And then quickly, just on the second one, Diagnostics. Late last year, you had H5N1 bird flu development CBC. It sounds like that actually could be an assay this year. Is that something we should expect?

Yes, I think the highest level I kind of laugh a little bit in that as you all, we put out the 5% to 7% for a three year window, the '23, '24, '25 window. In our very first year, we probably delivered about 17% organic in that year and everybody was challenging us to raise that number. And effectively, what we're really saying is we're mid-single digits, and this year, frankly, just for a few quarters, we think we're below it, not for the full year to be below that but just as it was way above, we said we weren't that good we're also not as bad in a cyclical period where we're recovering from the -- frankly, a lot of those big comps. So what gives us excitement going forward really is each franchise, right? The surgical business keeps strengthening and the addition of Gynesonics, the international expansion there is looking great. Our Diagnostics business, as we've said, is great. By the way, we'd love to view that H1N1 is going to be anything. I probably put this one in my world, kind of like the Zika virus. We're always there for the government and for the CDC to be one of the quickest to develop any of these. And even as we did in COVID right at the beginning, we didn't know it would amount to anything. Obviously, that would have amounted to something very big. I wouldn't assume a lot for H1N1. If that came, that would be upside to our business. And then the Breast Health business, as we continue to build out the disposable side of the business, the interventional side with things like Endomagnetics. And then as the new gantry kicks in next year, I think that gets us back very solidly into our longer term consistent trajectory in that mid-single range of top line growth.

We'll move to our next question from Doug Schenkel with Wolfe Research.

Two, that I'd like to touch on. One is it's just a little bit unclear to me how much of the change in your assumption that you've embedded into guidance for Breast Health as a function of market conditions versus a reassessment of the impact of market stalling in advance of the new gantry launch? If it's more stalling that lead to a big acceleration in revenue growth down the line if it's a market that's something else. So could you just provide a little more color there? And then the second topic is really M&A. In your prepared remarks, you talked about the importance of M&A as part of the long term strategy. Can you just provide any updated thoughts on, one, the environment given the new administration and two, what parameters you're using in assessing potential targets, revenue growth, margins, accretion, ROIC?

I'll start with the breast comments here. So I do think we tried to outline that it is a blend of both market conditions and given our high market share, our new launch slowing the market down. But if you had the weighted, I would say market conditions are the bigger impact. And so that does give us confidence about our future moving forward and do expect this business to accelerate as we exit the year moving forward. The big thing I would say is that if you think about coming out of the chip shortage with a significant amount of pent-up demand we got through a ton of that, I would say, over the '23 and '24 time period. In addition to that, as we've seen other areas of acceleration, those were driven by large innovation advances, primarily driven by us. And so when you saw going from the to 2D the 3D market that was a huge catalyst not only technological advance but also with regard to reimbursement and a number of factors that helped physicians and caregivers. So as we look at technicological events coming up here, I would say, from us early in '26, we do believe that has an impact. But largely, I think the chip shortage rebound is playing a bigger impact on the slower year this year with the breast business. So I still would say it's both, but if I had to lean one way or another, I would tell you that it's a bigger impact on the market. And I'll probably start with the M&A and then kick it to Karleen. And I would say our capital allocation strategy is M&A first. And obviously, anything we can do to help the bottom line if needed we have the luxury of being able to do both. I think if you look at our most recent acquisitions of Endomagnetics and Gynesonics that's the right in the wheelhouse of what we would like to continue to do. Nice size, on-market products that we can grow at a top line at an accretive rate to our core growth rate is exactly the place we'd like to be.

And just to build off of that, when we look at financial metrics, it clearly starts with the revenue, we were looking at assets that are accretive to the growth rate. We're looking at things that hopefully have a gross margin that is at the corporate average or may be accretive. And like we've seen with Gynesonics, sometimes they're going to be dilutive on the bottom line, but I think we've got the flexibility to manage that. And then I think over the longer term, we look for a double digit ROIC within a reasonable time frame in terms of return on that investment. So -- and I think if you look at both Endomagnetics and Gynesonics, they played nicely within that framework.

We'll move to our next question from Vijay Kumar with Evercore ISI.

Steve, a couple of guidance related questions here. One on Breast, I think Breast Health guidance here, is the organic for the segment assuming down mid-singles? Steve, I thought I heard you say the year-on-year decline includes the acquisitions. So I guess the organic implied is down mid-single. Is that right? And I guess looking at Q1, why wouldn't trends improve from Q1?

So you are right that the organic would be closer to a mid digit decline year-over-year. And I think as we think about sequentially Q1 to Q2, we're looking at similar performance, Q1 to Q2 in terms of absolute dollars. I think we're looking for improvement into Q3 and into Q4. and I think we specifically said Q4 would have a nice growth rate as we exited the year.

And Karleen, maybe the follow-up on a similar question on the surgical franchise. I think the high singles includes Gynesonics, so excluding the [indiscernible] point to low singles growth. I guess Q1 was impacted by flu shortage, right? Shouldn't that go away and numbers improve if Gyn was up low singles, shouldn't that be mid to high singles in the back half?

So what I would say is as we did see the impact of the IV fluid shortage in Q1 result as we exit the quarter, as we think about Q2, think about Q2 as always a step back from Q1, given the reset of deductibles. And then we'll have improving growth rates in the back half of the year and certainly as we add Gynesonics into that equation. But I think we've provided the guidance on with Gynesonics for what we expect for growth.

We'll move to our next question from Tycho Peterson with Jefferies.

Steve, just curious, given your exposure across the portfolio to screening, Breast, Diagnostic, Skeletal, just thoughts on USPSTF given the Braidwood case. What should we be thinking about here, what have you kind of factored in as you think about guidance for the year?

We don't expect a big impact from that. At the end of the day, we feel really good about the products that we're providing are meaningful for both patients and frankly, ones that ensures we'll want to continue to take care of. So I think with all the stuff we have going on we're not worried about that and feel very good about where we'll be.

And then a follow-up on just Panther utilization. I guess how should we be thinking about utilization growth in the next, call it, five years? Can you kind of double utilization while holding the installed base flat? And what should we be thinking about for the next leg of growth beyond STIs, which have been putting up great growth, but how do we think about kind of further menu expansion?

I think the part that we feel great about, both for Panthers is whether it would double on the existing base that might be a little aggressive but there's significant opportunity without needing to place them, which is a capital placement. And similarly, frankly, our capacity to manufacture because of all the expansions we did during COVID, our need for CapEx and things like that are very low. So on the margin, the ability to expand as we bring more menu. And really that menu is going to largely be as we expand the Panther Fusion sidecar. And I think Fusion is not getting as much attention probably as it deserves because that really opens up the dramatic opportunity for our PCR assays, which are cheaper to produce or cheaper to bring to market faster and things like our GI and other things that will be coming down the road will be on that. So the magic is we've got this incredible installed base that we really can't build on through both Fusion and the additional menu. So I think we've got multiple, multiple years of opportunities ahead of us here.

We'll move to our next question from Casey Woodring with JP Morgan.

So on Breast, can you break out performance in the quarter between US and international customers? You mentioned the international opportunity as a growth driver in the past. But today, you kind of talked about some budget constraints from customers abroad. So wondering how much of an impact you're seeing from that dynamic and the visibility into that improving over the course of the year? And then I have one follow-up.

So we look at the performance of the Breast business. We had declines both in the US and international, both were in the mid-single digits, probably a little higher decline internationally.

I think it's the same issue of just a much slower market right now.

And then at our conference, you mentioned that part of the reason you're launching the new gantry in 2026 instead of earlier is that you're consolidating manufacturing to one facility in Breast. Just curious on timing there and the potential margin benefit once the consolidation is finished and the next gantry is launched and ramped?

So I think we're on track with the facility with the consolidation. So expect that the facility will not be a hold up as we get into '26. I think in terms of margin, while we will have benefit from consolidation of the facility and probably a little higher ASP on the new gantry, we do have actually higher costs. If you think about one of the components of that new gantry is that for the [arm] to move forward. So I wouldn't expect a change in the margin profile, I think they all kind of net out at the end of the day.

We'll move to our next question from Tejas Savant with Morgan Stanley.

Just a couple of cleanups on the gantry side of things, Steve. So I know you've talked about an upgrade pathway on existing gantry sales. Can you just provide some context and the degree to which that that's unlocking some conversations for you or is it really not sort of making much of a dent pending the new gantry launch? And then given the leadership and then compensation sort of adjustments that you've made on Breast Health performance, how should we think about the lessons we learned here here? I mean, obviously, you talked about perhaps assuming a greater quantum of growth. But beyond that, operationally, are there any other lessons that you will take away from the lowering of the growth forecast here of the gantry side of things?

I think the discussions for Envision, I think, from a leading customers, there's a lot of excitement. So I think we feel great about -- we have been the innovators in this space, we've been the pioneers, we've been on the leading edge, continue to feel very good about being in that continued position. I think we did -- we probably just got a little overeager about the market growth rates and didn't look back hard enough to realize what we actually had was a bolus in '23 and beginning of '24 as opposed to a long term trend. We were way above that long term trend, more gantries were placed in those quarters than are typical. And I think we had some questions I remember Karleen actually challenging the team a little bit. I think we were just a little too optimistic in that division of thinking about it. And I probably didn't go as deep as I should have in completely challenging the underlying assumption of the market growth rate. So it's a quick lesson learned, a little bit of a misstep there and we're right back on track. And yes, I will tell you, I feel really, really good about the new leadership that Essex has put into that business, a new division President, a new Head of Sales. And I think a deeper level of rigor, analytics and fire than what we had probably coming out of the chip shortage.

And then maybe one for you, Karleen. Just to clean up on the tariff side of things, I appreciate the color on Mexico as it relates to Gynesonics and Skeletal. But at a high level, given the shifting headlines from one day to the next, how much of Hologic's OUS revenue is made in the US and how much of US revenue was dependent on manufacturing overseas at the portfolio level? Obviously, you've talked about Canada and Mexico exposure as being pretty minimal. You don't sell much in China. So just any color at the portfolio level would be great.

Our biggest exposure would be related to our manufacturing in Costa Rica. We manufacture all of our surgical products, except for Gynesonics in Costa Rica and substantially all of our disposal Breast Health products in Costa Rica. So if there was a tariff imposed there that would be the most significant challenge to us. I think the tariffs have been talked about, right now Mexico is the one that would -- it was enacted would impact us but not terribly significantly, but we did want to call it out.

And overall, I think we're in a really good position in some days and that effectively all of our gantries and most of our molecular diagnostics are all made in the United States. So resisted a lot of those moves to go overseas through the years and I think that's going to benefit us here well for the next few years at least.

We'll move to our next question from Ryan Zimmerman with BTIG.

Two for me. One on Breast and I know you've talked a lot about it this evening. But as we think about 2026 when you do launch the new gantry, arguably, that would carry a price increase with it. And given where we're assuming kind of growth is today, are you suggesting or implied in that would be a decline in units just in terms of unit volume, which is offset by potential price increase? And just taking in the context of Essex's comments that you're selling 3D to 3D now going forward?

I think what you'll start to see in '26 is units will start to improve again as the new launch and we will have a combination of both units as well as additional price from a mix standpoint. So it's why we feel really good about where we're going to head. We're not going to guide to '26 at this stage. But it's very nice to be sitting where we're sitting, feeling like we've got line of sight and we know a couple of down quarters here and then we come roaring back.

And then on Gynesonics, I heard you guys call out. I think I heard and correct me if I'm wrong, Karleen or Essex, $28 million in sales, you're guiding to 25 incrementally for this year. I just want to understand, I think that was $28 million on [indiscernible] basis. The $25 million is that three quarters worth of sales or is there some disruption assumed there? I just want to be clear?

The prepared remarks was $25 million for the balance of the year, which is the three quarters.

We'll move to our next question from Jack Meehan with Nephron Research.

Karleen, I had a couple of guidance related questions for you. The first one is you talked about some of the policy uncertainty as it relates to the HIV testing. I just wanted to clarify, did you build in -- you talked about disruption up to $30 million of sales. Is that in the guidance or did you put in a risk adjusted number in the guidance or just how did you handle that?

It's just it's in the -- substantially in the guidance [Multiple Speakers] even there has been a waiver there is clearly disruption on the ground. And so they could impact the supply chain significantly. So that's why we decided to include it.

And just to make sure I understand from a reporting perspective, this would show up in the molecular line for the virology testing or is it something else?

Virology and molecular, yes, that's correct.

And then just was wondering if -- I heard the commentary around for the year and it sounds like there's a little bit of a second half step up. Just any color around where we should be landing in 2Q for gross margins and op margins would be helpful?

I would say op margins for Q2, you might have a little sequential improvement. But clearly, more improvement in the back half as we see improvement in revenue as well as we talked about Q1 and even Q2 to some extent are our largest operating expense quarters, really Q1 with some of our larger commercial meetings and then some of the variable comp structure is weighted to expense in the first two quarters versus the last two quarters.

We'll take our next question from Puneet Souda with Leerink Partners.

If you don't mind, I want to go back to Breast again. It appears to me, obviously, three issues here. There's the assessment of the forecast, you also had some changes in the incentive comp and sales reps and then there's the market issue with the hospital CapEx. I mean, if I look at the sales side, can you elaborate a little bit on the incentive comp changes and the sales rep changes in the field? And then on the hospital side, if the CapEx pressures that are on today, if they were to get worse, how would it -- how can a hospital continue to purchase sort of new equipment if they have to stress their dollars longer? Just thinking about the sort of the pressures that the hospitals are seeing and then maybe potential pressures that could arise from those or other efforts focusing on the hospitals?

I think as we think about the hospital CapEx to come at that, I think we still feel good, right? And again, I can always go back on the '08, '09 downturn where we saw the incredible pressures. Given where mammography sits, which is a few hundred thousand dollars a unit and how critically important women's health and mammography screenings are for hospitals, I think we feel really good that those markets are going to continue to be fine and be there. And then from -- it's back to overall standpoint, the market a little down. Our sales force evolution is one of these things, we go through it from time to time in each of our businesses and we're shifting a little bit more to get -- making sure we're really driving those gantry sales going forward. I think we took our foot off -- our eye off the ball a little bit during the chip shortage because candidly we couldn't deliver. And so now still getting back to that focus on delivering the gantries.

We'll take our next question from Andrew Cooper with Raymond James.

A lot to ask, but maybe just one on kind of the pace of Panther Fusion adoption. Is there any reason that 40% has a cap and can't get to 100 down the road? How do you think about kind of the uptick there as existing customers look to potentially layer in that additional menu? And what does it take from a new menu build out perspective to maybe push some of those folks who haven't done it yet to start looking at a Fusion?

I think we feel really good that ultimately, it probably could get close to 100. And it's just kind of a steady improvement as we just win customers one at a time. The molecular diagnostics business, I think some people don't always understand how much effort it takes to change over a customer from one assay to another. And I think what we feel great about is as the lab techs are using Panthers, they just want to keep adding more. And then it's, okay, we'll add a Fusion, we'll qualify a new assay. And so we keep bringing these things out, it's really kind of multiple years of growth ahead as opposed to any one yea of massive step up. So I think that's what gives us the underlying confidence that it just grows over time.

And if I can sneak one more in, just on the margins, just want to make sure I understand the guide. If we go past quarter, it was near 30% in 1Q, climbing 50 to 100 basis points. The language was just a little different this quarter in terms of that low 30s for the year and getting better each quarter. Is the exit rate fairly similar, how do we think kind of the landing spot as we move through the course of the year, knowing that the slightly lower revenue is certainly a drag on top of maybe some dilution from the M&A?

We'll certainly exit the year at a higher operating margin than where we're at here in Q1 and Q2. But I would just caution that, that's not really -- you're jumping off point for '26. Again, we have some seasonality to our operating expenses as well as highest operating expenses in Q1 and actually typically lowest revenue in Q2. So we will see that improvement that would not be a jumping off point for '26.

I think as a reminder, we always do see our operating margin improves over the course of the year, as Karleen said, because the way our expenses flow. And then too often, I think people look at the fourth quarter rate as a, launching off point. We think about it as each quarter year-over-year, so first quarter relative to last first quarter, you look at we just had 80 basis points of gross margin improvement in the current quarter, 90 points of op margin improvement in Q1. We just keep thinking about that -- those rates as opposed to -- and then ultimately, averaging it over the course of the year but feeling that we'll post better margins this year than last year, and they were already pretty good last year. So thank you.

This concludes our question-and-answer session. We will now conclude today's conference call. Thank you for your participation. You may now disconnect, and have a great day.