GE HealthCare Technologies Inc. (GEHC) Q3 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call reveals strong financial metrics, optimistic guidance, and strategic advancements in nuclear medicine and AI integration, suggesting positive stock movement. Despite some uncertainties in tariff mitigation and competitive impact, raised guidance for revenue, EBIT margin, and EPS, alongside new product launches, supports a positive outlook.

Key Financial Performance

Organic Revenue Growth 4% year-over-year growth, driven by strong performance in Imaging, AVS, and PDx businesses, particularly in EMEA and the U.S.

Orders Growth 6% year-over-year growth, reflecting solid customer demand and strong commercial execution.

Service Revenue 6% year-over-year growth, driven by new and existing customer agreements.

Product Revenue 5% year-over-year growth, reflecting healthy customer demand and procedure volumes.

Adjusted EBIT Margin 14.8%, down 150 basis points year-over-year, primarily due to a $95 million tariff impact. Excluding tariffs, margin would have expanded by 30 basis points.

Adjusted EPS $1.07 per share, down 6% year-over-year, including a $0.16 tariff impact. Excluding tariffs, EPS would have been up in the high single digits.

Free Cash Flow $483 million, down $168 million year-over-year, primarily due to higher receivables from revenue growth and $95 million in tariff payments.

Imaging Segment Revenue 4% year-over-year growth, driven by strong commercial execution in EMEA and the U.S. Segment EBIT margin declined 260 basis points due to tariff pressures.

Advanced Visualization Solutions (AVS) Revenue 6% year-over-year growth, driven by strong U.S. performance and demand for new products. Segment EBIT margin increased by 180 basis points due to volume growth and cost productivity.

Patient Care Solutions (PCS) Revenue Down 7% year-over-year, primarily due to a product hold. Segment EBIT margin declined 680 basis points due to the product hold, unfavorable product mix, and tariffs.

Pharmaceutical Diagnostics (PDx) Revenue 10% year-over-year growth, driven by strong performance in contrast media and radiopharmaceutical portfolios. EBIT grew 14%, but margins declined 150 basis points due to planned investments.

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Operating Highlights

R&D Investments: GE Healthcare has invested over $3 billion in R&D since 2022, leading to the development of innovative products such as AI-powered systems in Advanced Visualization Solutions (AVS) and redesigned Interventional Cardiology systems with onboard AI capabilities.

New Product Launches: The company launched new products in PCS, including a refreshed anesthesia delivery system, a monitoring platform for non-U.S. markets, and CareIntellect for perinatal care. Additionally, Flyrcado, a pharmaceutical product, has shown strong customer feedback and is expected to drive long-term growth.

AI Integration: AI-enabled products have been integrated across various segments, including ultrasound and imaging systems, contributing to revenue growth and margin expansion.

Global Market Trends: The global capital equipment market remains healthy, with improving tenders in China and strong performance in EMEA and the U.S.

Strategic Collaborations: GE Healthcare announced a 14-year Care Alliance with UC San Diego Health to advance cancer care and imaging solutions, exemplifying its ability to create predictable revenue streams.

Operational Efficiency: The company has mitigated approximately 50% of its 2025 gross tariff exposure and is implementing initiatives like sourcing from lower-cost regions and value engineering to improve margins.

Revenue and Orders Growth: Organic revenue grew 4% year-over-year to $5.1 billion, with robust orders growth of 6% and a solid backlog of $21.2 billion.

Acquisition of icometrix: GE Healthcare plans to acquire icometrix to integrate digital tools for Alzheimer's care, strengthening its portfolio in MR systems and PET amyloid agents.

Focus on AI and Innovation: The company is introducing a significant number of AI-enabled products and solutions, expected to drive medium-term growth and margin expansion.

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Risk or Challenges

Tariff Impact: The company faces significant tariff pressures, with a $95 million impact in the third quarter alone. This has led to a 150 basis point decline in adjusted EBIT margin year-over-year. Despite mitigation efforts, tariffs are expected to impact adjusted EPS by approximately $0.45 for the full year 2025.

Product Hold in Patient Care Solutions (PCS): A product hold in the PCS segment led to a 7% decline in organic revenue and a 680 basis point drop in EBIT margin year-over-year. Although the issue has been resolved, it caused significant disruption in the quarter.

Macroeconomic Margin Pressures: Broader macroeconomic pressures, including tariff impacts and investments, have led to a 300 basis point decline in adjusted gross margin year-over-year. These pressures are partially offset by volume growth and pricing momentum.

Supply Chain and Sourcing Challenges: Efforts to mitigate tariff impacts include sourcing from lower-cost regions, developing second sources, and executing site transfers. These initiatives aim to improve margins but highlight ongoing supply chain vulnerabilities.

Segment-Specific Challenges in Imaging and PCS: The Imaging segment experienced a 260 basis point decline in EBIT margin due to tariff pressures, while PCS faced challenges from unfavorable product mix and the earlier product hold. Both segments are under pressure to improve margins and operational efficiency.

High R&D and Investment Costs: The company has shifted certain R&D costs to cost of goods sold as products near commercialization, impacting margins. While these investments are aimed at future growth, they contribute to current financial pressures.

Free Cash Flow Decline: Free cash flow decreased by $168 million year-over-year, primarily due to higher receivables from revenue growth and increased tariff payments.

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Guidance & Outlook

Adjusted EPS Guidance: The company has raised its adjusted EPS guidance for the full year 2025 to a range of $4.51 to $4.63 per share, reflecting strong performance year-to-date and healthy capital investment trends.

Free Cash Flow: The company expects to deliver free cash flow of at least $1.4 billion for the full year 2025, including tariff payments.

Organic Revenue Growth: The company continues to expect full-year organic revenue growth of approximately 3% for 2025.

Adjusted EBIT Margin: The adjusted EBIT margin for the full year 2025 is expected to remain in the range of 15.2% to 15.4%.

Tariff Impact: Tariffs are expected to impact adjusted EPS by approximately $0.45 for the year 2025, with a lower net tariff impact anticipated in 2026.

New Product Launches and AI-Driven Solutions: The company plans to introduce a significant number of new AI-enabled products, solutions, and services at RSNA, which are expected to drive significant growth and margin expansion over the medium term.

Imaging and AVS Segments: The company anticipates continued revenue growth and margin improvement in the Imaging and Advanced Visualization Solutions (AVS) segments, driven by new product launches and AI-powered systems.

Patient Care Solutions (PCS) Segment: The PCS segment is expected to see significant improvements in growth and margin performance under new leadership and with the resolution of a product hold.

Global Market Trends: The company observes a healthy capital equipment market globally, with improving tenders in China and ongoing recovery.

Innovation Investments: The company has invested over $3 billion in R&D since 2022, with new products expected to accelerate revenue growth and margin improvement in 2026 and beyond.

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Shareholder Return Plan

Share Repurchase: During the third quarter, we repurchased approximately $100 million of our shares, reflecting our confidence in our growth prospects.

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Key Q&A

Q:What are the company's views on growth in China for this year and next year, and their long-term business strategy in China?

A:The company sees stimulus tender activity improving and market recovery ongoing in China. They expect second-half China sales to be lower than the first half, as anticipated. Investments in market access capabilities and clinical selling are showing positive progress in ultrasound and imaging. Despite challenges from stimulus and anticorruption campaigns, they see no structural reason preventing China's market growth. The company values the China business for its long-term potential and continuously assesses its segments and products for growth and fit in the portfolio.

Q:Is the company confident in achieving its mid-single-digit organic revenue growth target for 2026-2028, and how does China factor into this goal?

A:The company remains confident in achieving mid-single-digit organic revenue growth for 2026-2028. They have invested significantly in R&D, which is expected to pay off with new products. If China remains a flat and stable market, the mid-single-digit growth target remains intact. For 2026, they expect to grow faster than the 3% growth projected for this year.

Q:Why did the company reiterate its full-year revenue guidance despite strong Q3 performance?

A:The company delivered 4% growth in Q3, exceeding the 2%-3% guidance, driven by strong performance in AVS, EMEA, and U-Scan. For Q4, they expect 3%-4% growth, aligned with earlier expectations. They are confident in achieving 3% growth for the year, supported by a secured rate of 80% for equipment-related business and historical trends.

Q:What is the status and outlook for Flyrcado, and what are the reasons for its slower ramp in 2025?

A:Flyrcado is progressing well, with exceptional image quality and a longer half-life unit dose model. The company is prioritizing customer experience over short-term revenue, focusing on achieving consistent 95%-plus yield and improving customer workflows. They expect a slower ramp in 2025 but are confident in meeting their 2026 and beyond goals, with Flyrcado potentially reaching $0.5 billion by 2028 and $1 billion with 25% market conversion.

Q:What is the update on Photon Counting and its expected impact?

A:Photon Counting remains on track, with plans to discuss it in detail at the upcoming RSNA. The company is excited about its unique approach, which is expected to significantly impact the market by improving image quality and how CT is used. The FDA submission and commercialization plans are progressing as scheduled.

Q:How does the company plan to improve the Patient Care Solutions (PCS) franchise after its decline in Q3?

A:The PCS franchise faced a 7% sales decline in Q3, primarily due to a product hold. The company has resumed shipping the product and expects some recovery in Q4, with further improvements in 2024. A new seasoned leader is focusing on driving growth and enhancing margins, which should yield meaningful improvements in the coming quarters.

Q:What opportunities does the company see in the ASC setting for electrophysiology (EP)?

A:The company sees significant opportunities in the ASC setting for EP, driven by leadership products like the Allia Pulse, Vivid Pioneer, and Mac-Lab AltiX. These products are designed to work together and integrate with device companies' products. New reimbursement policies also support growth in the ASC setting, positioning the company as a one-stop shop for EP solutions.

Q:What is the impact of the transition between R&D and COGS on gross margins, and how long will it last?

A:The transition of product expenses from R&D to COGS, as products move closer to commercialization, impacted gross margins by 60 basis points in Q3. This dynamic will continue in Q4 and into 2024 but is net neutral to adjusted EPS. The company expects sequential gross margin expansion of over 50 basis points in Q4.

Q:What is the company's strategy for rolling out new systems like Photon Counting and total body PET in 2026?

A:The company plans to announce and showcase new systems like Photon Counting and total body PET at RSNA, with regulatory approvals determining the rollout sequence. They are working with customers to plan upgrades and align budgets, ensuring minimal site disruption and smooth transitions. RSNA serves as a milestone for final planning and customer engagement.

Q:How is the company leveraging AI to drive growth and differentiation?

A:The company is integrating AI into products like AVS, which has shown superior performance and higher margins. The CareIntellect platform connects multiple modalities and data flows for departmental solutions. Digital revenue is expected to grow from $1.2 billion to $1.8 billion by 2028, supported by 100 FDA-authorized AI-enabled devices. AI is enhancing product differentiation, pricing, and market share.

Q:How does the company view its progress against its long-range plan from the November Analyst Day?

A:The company feels on track with its long-range plan, confident in achieving mid-single-digit growth and 17%-20% margins. They highlight strong go-to-market execution, product launches, and filling portfolio gaps with differentiated products. The upcoming RSNA will showcase these advancements.

Q:What is the company's outlook for Flyrcado and its impact on the PET market?

A:The company is confident in Flyrcado's potential, with a larger opportunity funnel than initially envisioned. They aim to convert 25% of the PET myocardial perfusion market, which could generate $1 billion in revenue. The existing PET installed base supports this goal, with additional growth from new PET systems in cardiology and oncology.

Q:What is the company's plan to mitigate tariff impacts in 2026?

A:The company expects tariffs to be a tailwind in 2026, with impacts less than the $265 million seen in 2023. They are implementing structural supply chain changes, leveraging free trade zones, and using selective pricing to offset tariff costs.

Q:Review of Unclear Management Responses

A:Management avoided directly addressing the implications of a competitor's FDA issues on the ultrasound market, stating they had no comment and that Q3 strength was due to internal factors. Additionally, they did not provide specific details on how much of the PET/CT backlog is driven by Flyrcado or the exact timeline for tariff mitigation efforts in 2026.

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Earnings Word Cloud

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