Operator: everyone and welcome to GE Healthcare third quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To participate, you will need to press star 1 1 on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, simply press star 1 1 again. Please note that this conference is being recorded. Now it's my pleasure to turn the call over to the Investor Relations Officer, Caroline Borders. Please proceed.
Caroline Borders: Thanks, Operator. Good morning and welcome to GE Healthcare's third quarter 2025 earnings call. I'm joined by our President and CEO, Peter Arduini, and Vice President and CFO, Jay Saccaro. Our conference call remarks will include both GAAP and non-GAAP financial results. Reconciliations between GAAP and non-GAAP measures can be found in today's press release and in the presentation slides available on our website. During this call, we'll make forward-looking statements about our performance. These statements are based on how we see things today. As described in our SEC filings, actual results may differ materially due to risks and uncertainties. With that, I'll hand the call over to Peter.
Peter Arduini: Thanks, Carolyn. Good morning, and thank you for joining us today. We delivered another quarter of solid results and were focused on executing our precision care strategy. In the third quarter, organic revenue grew 4%. We delivered robust orders growth of 6% with growth across all segments. This reflects solid customer demand for our innovative solutions, a healthy capital equipment environment, and our strong commercial execution. We're now entering a new wave of innovation as a result of our increased R&D investments over the past few years. When you couple this with our focus on lean, we expect to accelerate future top and bottom line growth. Solid backlog demonstrates that our customers are investing in our new products and solutions. For instance, we're seeing robust growth in contrast media and nuclear medicine, where we're uniquely positioned to deliver end-to-end solutions for our customers. Our synergistic portfolio of diagnostic imaging equipment, radiopharmaceuticals, AI cloud, and software help drive efficiencies for our customers and creates a competitive advantage for the company. Looking at commercial execution, we continue to see momentum across our business as we secured multiple large system deals in the quarter, totaling nearly a half a billion dollars in future revenue. Earlier this month, we announced a 14-year care alliance with UC San Diego Health focused on early detection and advancing cancer care with imaging solutions and novel therapies such as Theranostics. Collaborations like these exemplify our ability to leverage our broad portfolio and service capabilities to deepen relationships with customers, creating predictable revenue streams. To support this, we've strategically invested in capabilities that accelerate growth and expand margins while enhancing operational efficiency across the healthcare ecosystem. In addition to organic investment, our disciplined capital allocation approach has strengthened our portfolio. For example, our planned acquisition of IcoMetrix includes digital tools to help clinicians detect and quantify potential high-risk side effects in patients undergoing Alzheimer's therapies. Global approvals of these therapies are increasing and demand for more frequent MRI exams and our pet amyloid agent, Vizimil, are also growing. With the integration of Icometrix technologies into our MR systems, we will strengthen our unique and comprehensive portfolio to support the full Alzheimer's care pathway. This is a great example of our D3 strategy at work, smart devices and imaging, and drugs and PDX enabled by AI. to create meaningful value for our customers and patients while driving sustainable growth for the company. As we continue to navigate a dynamic global environment, our teams remain agile and focused on operational improvements and actions to reduce tariff impact. We've mitigated approximately 50% of our 2025 gross exposure, and we're on track with our goal of delivering a lower net tariff impact in 2026 versus 2025. based on currently enacted tariffs. As a result of our strong performance year to date and the healthy capital environment trends we're observing, we're pleased to raise our adjusted EPS guidance, which Jay will expand on later in the call. Above all, we're intensely focused on delivering for our customers and shareholders. With that, I'll hand the call over to Jay.
Jay Saccaro: Jay? Thanks, Pete. Let's start with our financial performance on slide four. We're pleased with our solid operational performance across the business in the quarter. Revenues of $5.1 billion increased 4% year-over-year organically, ahead of our expectations. Revenue growth was driven by strength in our imaging, ABS, and PDX businesses. We saw particular strength across EMEA and the U.S. On a reported basis, service revenue was strong. growing 6% year-over-year, driven by new and existing customer agreements. Product revenue was up 5% year-over-year, reflecting healthy customer demand and procedure volumes. We delivered robust organic orders growth in the quarter, up 6% year-over-year. On a trailing four-quarter average, orders growth was also up 6%. We delivered strong book-to-bill at 1.06 times, and we exited the quarter with a solid backlog at $21.2 billion. Taken together, we believe these metrics, as well as our success with multi-year enterprise deals and high-margin innovations, are good indicators of future growth. Adjusted EBIT margin was 14.8%, down 150 basis points year-over-year. We delivered adjusted EPS of $1.07 per share, down 6% year over year. This included approximately 16 cents of tariff impact. Excluding this impact, adjusted EPS would have been up in the high single digits year over year. Lastly, our free cash flow was $483 million in the quarter. Looking closer at margin performance in the third quarter on slide five, adjusted EBIT margin of 14.8% was down due to the impact of tariffs, which was approximately $95 million and was partially offset by favorable volume and pricing. Excluding the tariff impact of 180 basis points, adjusted EBIT margin would have expanded approximately 30 basis points. Adjusted gross margin declined 300 basis points year over year, primarily due to tariff impact and investments. strong volume growth, and sustained pricing momentum have helped to partially offset broader macroeconomic margin pressures. Related to investments, similar to last quarter, we had certain costs move from R&D to cost of goods sold as products moved closer to commercialization, including in MR and PET. Without this shift, R&D expense would be up year over year, reflecting our continued commitment to innovation investments. We have a number of strategic programs underway to drive operational margin expansion. These include sourcing from lower cost regions, developing second sources, implementing value engineering initiatives, executing targeted site transfers, and achieving price increases. These efforts are not only designed to improve our margin, but also strategically reduce our exposure to high tariff trade flows. further strengthening our global supply chain resilience and margin profile. Taken together, these initiatives contributed to the 30 basis points of adjusted EBIT margin improvement, excluding the impact of tariffs, and we mitigated nearly half of the gross tariff impact. We're also driving greater efficiency in SG&A while making targeted investments in commercial capabilities, such as with Florcado. to strengthen our go-to-market approach and support long-term growth. These actions reflect our commitment to margin expansion and delivering sustainable value. Moving to segment performance, starting with imaging on slide six, organic revenue in the quarter was up 4% versus the prior year, driven by strong commercial execution in EMEA and the US, as imaging equipment remains a top investment priority for customers. Segment EBIT margin declined 260 basis points year-over-year, largely driven by tariff pressures. We're pleased that, sequentially, both imaging revenue and margin increased. We're focused on discipline price management as well as operational efficiency and platforming improvements. Overall, we saw robust growth in the U.S. as customers continued to upgrade an aging installed base in areas such as radiology and cardiology. Turning to advanced visualization solutions on slide seven, organic revenue was up 6% year-over-year with strong performance in the U.S. and demand for new products. Segment EBIT margin increased by 180 basis points year-over-year, driven by volume growth and cost productivity. We had strong execution in new products and commercial investments that are delivering faster growth and higher margins. This was the fourth consecutive quarter of year-over-year sales and margin growth for AVS. Our pipeline continues to focus on growing many clinical areas, including our cardiovascular ultrasound market leadership. Examples of this. include our most recent Vivid Pioneer launch, which has been well received by customers, and other key products for radiology and cardiology interventional procedures. In addition, AI-enabled products launched earlier in the year are contributing significantly to our revenue growth and margin expansion. Turning to patient care solutions on slide eight, orders growth in the third quarter was healthy. However, organic revenue was down 7% versus the prior year, primarily due to a product hold. This hold has now been resolved, and shipments for the impacted product have resumed, positioning us for a sequential sales step-up in the fourth quarter. Segment EBIT margin declined by 680 basis points year over year, primarily driven by the product hold, unfavorable product mix, and tariffs. With expected volume improvements and continued productivity actions, we anticipate a meaningful sequential improvement in EBIT margin in the fourth quarter. Earlier this year, we brought Jeanette Bankas on as our PCS leader, and we're seeing progress around her efforts with the goal to improve growth and margin performance. She's working to drive commercial execution for recent product launches and setting the business up for sustainable growth. She brings a new perspective, and her top priorities are accelerating growth, driving variable cost productivity, and optimizing our cost structure. We're confident these actions will yield meaningful results. We're also excited about new product launches and AI-driven software solutions in PCS. These build on our clinical capabilities and are expected to drive faster growth and higher margins. Moving to pharmaceutical diagnostics on slide nine, we delivered a strong quarter with sales growing 10% organically year-over-year. This was driven by solid performance in our contrast media and radiopharmaceutical portfolios, both of which contribute to our growing recurring revenue profile. EBIT grew 14% while margins declined 150 basis points year-over-year due to planned investments in NPIs such as Flercado. as well as the Nihon Metaphysics acquisition. We're very encouraged by the growth in our U.S. radio pharmaceuticals business and in our molecular imaging equipment. Imaging and PDX work in concert, and when enabled by AI and services, we're uniquely positioned to bring value in new ways for our customers. Let's look at cash performance on slide 10. We deliver free cash flow of $483 million with a 99% free cash flow conversion. This was down 168 million year over year, primarily due to higher receivables, attributable revenue growth, as well as higher tariff payments of approximately $95 million. As it relates to our capital allocation strategy, our priority is to drive organic growth while evaluating a rich M&A pipeline focused on tuck-in opportunities. We'll maintain a disciplined approach that aligns with the key metrics we've discussed in the past. During the third quarter, we repurchased approximately $100 million of our shares, reflecting our confidence in our growth prospects. Our strong balance sheet coupled with an attractive leverage profile positions us well to execute on our capital allocation strategy. Let's turn to our outlook on slide 11. Given the strong performance year-to-date and healthy capital investment trends, we're updating our guidance for full year 2025. We continue to expect full year organic revenue growth of approximately 3%. Based on where our rates are today, we expect FX to be a 50 basis point tailwind to revenue. Adjusted EBIT margin for the full year is unchanged in the range of 15.2% to 15.4%. We remain focused on innovation, productivity, and G&A optimization to drive long-term margin expansion. We expect our adjusted effective tax rate to be in the range of 20% to 21% for the full year. For adjusted EPS, we're raising the lower end of our guidance range and now expect to deliver between $4.51 and $4.63 per share for the full year. Based on the current environment, we continue to expect tariffs in 2025 to impact adjusted EPS by approximately 45 cents for the year. Finally, we expect to deliver free cash flow of at least 1.4 billion for the full year, which includes the tariff payments. With that, I'll turn the call over to Pete. Pete?
Peter Arduini: Thanks, Jay. Turning to innovation, We've invested more than $3 billion in R&D since 2022 to deliver differentiated products and solutions that exceed customer expectations. Our R&D and go-to-market execution is enabling accelerated growth and margin improvement. A great example of this is in AVS. In 2024, we launched AI-powered systems across the entire segment. We've had strong customer adoption for these products. and image-guided solutions, we redesigned our interventional cardiology system, Alia, with a more powerful tube, reduced footprint, and onboard AI capabilities. It's ideal for ambulatory surgical centers and office-based labs, allowing us to partner with customers and win new deals in a rapidly growing ASC setting. In addition, our ultrasound portfolio underwent a complete refresh. We integrated advanced technology like Caption AI and are upgrading our entire fleet of our clinical subsystems into common platforms, which has increased the margins of these new products compared to prior models. All of these are driving revenue growth and margin accretion now, and we expect that to continue in 2026 and beyond. Moving to the middle row on the chart, where we feature several products that are commercially available in 2025. In PCS, we're excited about three new products, a completely refreshed anesthesia delivery system, a monitoring platform that allows us to compete in new ways outside the U.S., and Care Intellect for Perinatal, a SAS offering designed with clinicians to provide real-time insights in labor and delivery. It's the first of many clinical and operational applications that we expect to deliver, faster growth, higher margins, and recurring revenue for PCS. Feedback on Forcado is strong, with exceptional image quality, half-life benefits, healthy reimbursement, and new global guidelines to increase clinical confidence. As a result, our prospect list is expanding, and we're going slow to go fast so that customers get the best experience, as this pharmaceutical has many years of strong growth opportunity in front of it. In September, we signed an agreement to distribute Fricado through CDL, an outpatient cardiology leader accounting for about one-third of the current U.S. PET procedures. Our commercial and clinical teams are working closely with their CDL counterparts to begin transitioning their customer volume in the coming quarters. We're also encouraged by the strong backlog of new PET systems that will support imaging tracer growth. In imaging, it's great to see the pipeline coming together after four years of investment. The new products will bring unique capabilities to the market and be key enablers for our sales teams to drive faster growth and higher margins in the imaging portfolio. We're entering a new wave of innovation across the enterprise, and these are some of our boldest ideas yet. We're confident that we have the right innovations across all of our segments. A strong commercial strategy and a clear path to accelerate revenue growth from these new products over the medium term. In summary, we feel good about our third quarter performance and the discipline execution that has helped us effectively navigate a dynamic environment. I'm proud of our teams as they've worked to offset costs and manage through macro challenges. We're pleased that despite a 45 cent tariff headwind, we expect to deliver adjusted EPS growth for the year. We remain fully committed to our total company medium-term targets shared at Investor Day and feel good about the underpinnings that support that growth. The fundamentals of our business remain strong. Globally, we continue to see a healthy capital equipment market and tenders are improving in China with the recovery ongoing. While PCS had a challenging quarter with new leadership and fresh eyes on the portfolio, we expect to see significant improvements in this segment. Lastly, as planned, we will introduce a significant number of new AI-enabled products, solutions, and services at RS&A. As we discussed at our last investor conference, these new products are expected to drive significant growth over the medium term and play a key role in margin expansion. Plan to join us in Chicago on December 1st and 2nd. Now, let's open up the call for questions.
Caroline Borders: Thank you, Peter. I'd like to ask participants to please limit yourself to one question and one follow-up. Operator, can you please open the line?
Operator: Thank you so much. And as a reminder, that is star 1-1 if you have a question and wait for your name to be announced. To remove yourself, press star 1-1 again. One moment for our first question. And it comes from the line of Lawrence Bigelson with Wells Fargo. Please proceed.
Lawrence Bigelson: Good morning. Thanks for taking the time. Hey, good morning, Pete. Congrats on a nice quarter here. I wanted to start on China. I heard your comments earlier on tenders improving in China. Any additional color on what you're seeing, how you're thinking about growth there this year and next year? And I know you won't comment on media reports, but can you comment on how you're thinking about your business in China long-term and if you'd consider ways to mitigate the risk or exposure to that market? And I had one follow-up.
Peter Arduini: Yeah, Larry, as I said in the prepared comments, you know, we're seeing the stimulus kind of tender activity improve and the recovery in the market is ongoing. I think that's kind of the headline. Last quarter, you know, I spoke about our second half China sales being lower than the first half, and that's playing out as we expected. Our new leader in the role there, Will, is doing a really nice job. He's been focused on making investments in market access capabilities and renewing our focus on clinical selling. Where we've implemented those changes, which we're going to be going across the whole country with them, we've seen positive progress, both in ultrasound and imaging. Look, the market's been challenged over the past two years due to stimulus as well as the anti-corruption campaign. That said, We don't see any structural reason to prevent China market returning from growth. You know, look, to your last point that you made, look, we like the China business. It's one of the largest healthcare markets in the world, significant portion of the population needing better access to care, and we're optimistic about its long-term potential. I would say, you know, we constantly look at our segments, our countries, our products, and assess their growth, their margin, And ultimately, they're a fit in the portfolio. It's just kind of how we run our business is what we do.
Lawrence Bigelson: That's super helpful. Pete, for my follow-up, the press release, the slides, and talk about revenue growth acceleration, it sounds like you're still confident in achieving your 26 to 28 revenue growth target, mid-single-digit organic growth. I just want to confirm that. And how much do you need China to recover to hit that goal? And is that... you know, mid single digit growth on the table for next year. Thank you.
Peter Arduini: Yeah, look, I would just say over the medium term, we feel good about mid single digit. Our views are the mid single opportunity hasn't changed for us. You know, since we spun in 2023, you know, we've invested, as we mentioned, significant amount in R&D, and it takes time for that to pay off. I think the example that we gave with AVS is a great example of of how that's paying off new products that have a faster growth profile because of leadership features a better cost position so it has higher profitability and that same model will apply to imaging and also pcs so you know we're excited about rsna coming up because you're going to see a lot of these new products coming out that will carry that capability that we just mentioned um so i think that's the that's the the broader point look relative to china consistent with what I've said in the past. If China remains roughly flat and stable market, you know, all of our goals relative to mid-single digit are intact.
Lawrence Bigelson: Jay, you may want to comment. Yep. On 26, sorry for interrupting.
Jay Saccaro: Sure. Just Larry, on 26, we're in our operating planning process right now. So a lot of work to be done there. But I think it's safe to say this year our expectation is to grow approximately 3%. We've pointed to record backlogs, outstanding book-to-bill order growth at 6% for the last four quarters. So we feel very good about the commercial momentum and the innovation momentum. And so as we look at 26, our expectation would be to grow faster than 3%. So stay tuned for that. our earnings call in February. But at this point in time, we feel very good about the progress that we've made.
Lawrence Bigelson: All right. Thanks for the very comprehensive answer, guys.
Operator: Thank you. Our next question is from Travis Seed with Bank of America Securities. Please proceed.
Travis Seed: Hey, congrats on a good quarter. Maybe the first question I have is maybe talk about some of the strength in Q3 and and why reiterate the full-year revenue guidance and not let more of that flow through for Q4?
Jay Saccaro: Yeah, thanks, Travis. We were definitely pleased with the commercial performance in the third quarter, and it's evidence of all the good progress that we're making, both from innovation and also a go-to-market standpoint. We previously said 2% to 3% in the third quarter. We delivered 4%, and I would say a lot of that comes from our AVS business, where we're seeing the dividends of all the innovation investment pay out, along with some great work in the field. We did see some particular strength across EMEA and USCAN, really driven by healthy CapEx environment and the procedural trends there. So overall, definitely pleased with the third quarter. As we look at the fourth quarter, our current expectation is 3% to 4% growth, very much aligned to our expectations in July. There's a bit of a benefit from the PCS, some of that coming back in the fourth quarter, that product hold. But as we did the analysis, historically, we've seen about a 9% step up from Q3 to Q4. We're modeling at the midpoint that 9% step up. The other thing we look at when we do revenue forecasting is we look at this idea of secured rate. Remember, about half of our business is is recurring, and the other half is equipment related. And for the equipment related, we have a portion of that business that has delivery dates in the quarter. And so at this point in the quarter, we have about 80% of the 50% secured. So we feel very good about where that sits relative to historic levels. It's consistent with that. Having said all of that, what I would say is our confidence in achieving the 3% has clearly increased based on the strong performance that we saw in the third quarter.
Travis Seed: That's great. Helpful, Pete. And then, Placato, just make sure you're on track to the $30 million in this year and how you should think about some of the puts and takes as that ramps over 2026 and 2027.
Peter Arduini: Yeah, Travis. Look, we're excited about this opportunity with Fricado. Opportunities like this only come around every once in a while. I mean, the customer feedback on Fricado has been great. Exceptional image quality over any other type of perfusion capabilities. The longer half-life, unit dose model, all those kind of make it a significant game-changing innovation for nuclear cardiology. And as I said in the prepared remarks, we're going slow to go fast. So for us, it's crucially important at this stage of the launch that customers have an excellent experience and are getting their processes and capabilities in place so that they can convert a majority of their patients or Focatto over a reasonable time period. So in 2025, we're going to be short of the 30 million, but with the progress we're making, we're really excited about the opportunity in 26 and beyond. So obviously the question is, so why slower ramp in 2025? Look, we made a deliberate decision to prioritize the customer experience rather than short-term revenue. And look, we've slowed the launch for two reasons. One is on the supply side. Remember, each of these products is delivered by a local contract manufacturing operation. And we're working to achieve a consistent 95% plus yield, which will deliver that exceptional experience to customers. It's taken some time to get to that level. But we're close to achieving that consistently now, which is a very good point. Second, we're working with our customers on their workflow, which is a combination of their billing and patient processes at the site. And so where we sit today, we're seeing week-over-week improvement on the number of patients treated with Forcado, and we expect that ramp considerably to move forward faster in the fourth quarter. So, look, with significant interest building, our opportunity funnel is actually exceeding what we initially laid out. We expect Percado to have a significant meaningful impact over time. And this positions us really well on our midterm expectations for a half a billion dollars by 2028. Now, if we were able to take 25% of the pet myocardial perfusion market and convert it to Percado, that would lead to roughly a billion dollars a year. And so, hence, why this launch, taking it at the right pace, we believe is super critical.
Travis Seed: That's great and helpful. Thanks a lot. Congrats again. Thank you.
Operator: Thank you. Our next question is from Joan Wensch with Citibank. Please proceed.
Joan Wensch: Good morning, and thank you for taking the questions. I have two. I'm just going to put them up front. Could you please give us an update on the timing for photon counting and how we should think about that ramping? And then the second question has to do with the patient care solution franchise. How do we think about going from down high single digits this quarter to reaccelerating over the next couple of quarters? Thank you.
Peter Arduini: Thanks, Joanne, for the question. Yeah, on photon counting, we remain on track to our plans that we have laid out. As you've seen on the slide that I referenced in our deck with the new wave of innovation, we actually have it there listed on the page. I think it's no surprise that we're ramping up here to be able to talk about it at our biggest radiological show here in the near future. So all of our plans relative to FDA submission, our plans to be able to communicate and talk about it in more detail are on track. Again, I would just say I'm, again, very excited about our approach. We are the most unique approach within the marketplace. It's the reason that we went this direction is not to follow the crowd, but to bring something that's going to have a significant impact in the marketplace, not just on the image quality changes, but actually how CT is used. And that's where we believe our deep silicon approach is going to make a significant difference in what's called spectral imaging. That's where we are, and we hope we'll see at the RS&A to see more of these technologies that I mentioned here on the page. Jay, maybe you can talk a little bit about PCS. Sure.
Jay Saccaro: We were disappointed with PCS performance in the third quarter, and really this comes down to a product hold. We did take quick action to be ready to ship units as soon as possible. Our regulatory team did a great job navigating the pathway here. And the good news is that we're back in the market shipping. We'll recover some of this in the fourth quarter. Some will bleed to next year. But overall, we feel good with the product back on the market. Of the 7% sales decline in the quarter, about five of that was tied to the product hold. And the margin was also significantly, in fact, impacted. In fact, about half of the margin decline year over year related to this product hold We had a big tariff impact as well of about a couple of hundred basis points. So as Pete said, or I said in my prepared remarks, we're really excited to have Jeanette on board, a seasoned leader, and she's looking carefully at the portfolio, the opportunities to drive growth and enhance margin. That will start to pay dividends in the fourth quarter, so we will see a meaningful improvement here, and then we'll also continue to pay dividends as we migrate into next year.
Operator: Let's take our next question, please.
Operator: Yes. Our next question is from David Roman with Goldman Sachs. Please proceed.
David Roman: Thank you. Good morning, everyone. I appreciate all the detail on some of the new products here. Maybe first we could go into AVS and specifically talk about some of the opportunities as we see procedure volumes like an EP potentially start to move into the ASC. I think in your earnings presentation from last year in the second quarter, you laid out all the key products that GE provides to support an EP lab, but maybe what are you seeing specifically on the opportunity in the ASC setting for EP?
Peter Arduini: Yeah, Dave, thanks for the question. I would say, look, Part of this started with this discussion. When we talk about D3, it's not just a slogan, it's about how we operate, which again is this whole part of leadership products that can plug and play across the disease state, focus on a disease state. So again, cardiology is a broader area, but a specific disease state might be electrical issues with the heart, to your point, and how they're addressed, and then how digital and tools can bring that together. And so the first part for us was having a lab that wasn't just competitive, but was leadership. And I would argue this is really our first cath lab in a long, long time that is a leadership position. And so we're seeing the uptick of that. So look, when it comes to electrophysiology, we see the opportunity that's out there, pulse field ablation, all the excitement that's in the marketplace. We want to be the partner of choice. That's a one-stop shop to be able to make that happen. And so You know, Phil and the team, I think, have done a really nice job. We're uniquely positioned with the Alia Pulse, its small footprint, its ability to play in ESCs. The Vivid Pioneer, our brand-new cardiovascular ultrasound platform, does a lot of early assessment, transesophageal work while the procedure is going on. And then our MACLAB new version, which is the Altex, which is the recorder for all of this during the EP procedure. Those all work together. And then we have partner relationships with many of the device companies that their products work more integrated with ours. So you couple that with the new reimbursement that's coming out that fundamentally takes what was 80% of the acute care reimbursement and makes it available in the ASC. We're really set up well to take advantage of that growth. And again, we want to be able to come to an institution and say, you want to really grow your EP business work with us. Whoever you use on the device side, we can make it easy for you to stand up. And in many cases, that's really what we're starting to see come through. So that's kind of how we look at electrophysiology. I would say structured heart has a similar framework to it as well.
David Roman: Very helpful. And maybe, Jay, just on the margin side, try and understand how long this transition between R&D and and COGS takes place, and maybe if you just unpack a little more operationally what's happening. I think on the last call you started talking about this. It sounded kind of like an accounting dynamic, but I think it's actually more of an operational dynamic. So how long does this kind of transition last, and how should we think about the trajectory of underlying gross margins and R&D going forward?
Jay Saccaro: Sure. Maybe let's just talk overall about the gross margin, and then we can get into the specifics of this aspect of it. Overall, in the third quarter, our gross margin was down 300 basis points year over year. About 180 basis points of that relates to tariff expenses. And then we had 60 basis points of really reclass or movement between R&D and cost of goods in the quarter, and that's about a little over $30 million. Now, overall, this is good news, because from our standpoint, as products move closer to commercialization, we start to record those product expenses as cost of goods versus R&D. And so it's net neutral to adjusted EPS. We actually have about 12 products, material programs, that are moving very close to commercialization stage. Pete talks about that extensively during his remarks. You'll see that on full display at RSNA. And remember, about 70% of our total engineering and product program spend sits within R&D. The remaining aspect, the 30, sits in COGS. And so overall, I think it's important to note R&D spending or project spending was up for the quarter, but we did see this dynamic. This dynamic will continue somewhat in the fourth quarter, and there will be some impact of this next year as well, but it's safe to say we will see margin expansion in the fourth quarter sequentially north of 50 basis points, a gross margin at the midpoint. And we'll also see, remember the third quarter also did have an impact from the product hold at a company level that was about 20 basis points. So overall, the team is intensely focused on margin expansion and gross margin expansion in particular. This particular item does sort of cloud what I think is a solid overall story. If you point to the bottom line, we saw 30 basis points of margin expansion in the quarter, excluding tariffs. We'll see more than that in the fourth quarter on our way to achieving the full year expectation.
David Roman: I got it. Very helpful. Thank you.
Operator: Thank you. Our next question is from Patrick Wood with Morgan Stanley. Please proceed. Beautiful.
Patrick Wood: Thanks, guys. The first one is really on the ultrasound side of things. Obviously, one of your peers has some spicy fun with the FDA. I think we all, a chunk of us, lived through this before with Cleveland and CT. Any implications for you when you think about the competitive market on that side and how that could evolve?
Peter Arduini: Patrick, I agree. We just saw the information as well, so I don't really have any comment, and there's really no effect in third quarter. The strength of our AVS in Q3 was really about really strong go-to-market execution in our field teams, and then the products that we mentioned, the Vivid Pioneer and the Venu point-of-care and Logic, all of those new products.
Patrick Wood: Gotcha. Makes sense. The other one's actually, you know, your Muse platform has like a 50% market share, if I'm right, on the ECG side of things. And I know you guys have got a partnership with AliveCore and a few other bits, but, you know, is there any interest on, you know, the longer-term, you know, cardiac termitary market? There's a lot of the patch players, that side of things, because, you know, that strength on the ECG side on the software end feels like that would pair well. Is that something you've ever thought about?
Peter Arduini: Yeah, so Patrick, I think, you know, Muse is to your point. It's the, you know, significant position relative to recording of all EKG data really around the world. And we have this AliveCore mode, which is a you know, portable handheld device that individuals would use, and that can be recorded in the base. Today, we have customers that actually, after an EP procedure, when they're sent home, they'll be sent home with the AliveCore device, and they do spot checks on themselves to make sure how effective the ablation actually was. That data all connects directly back into our system. So that's there today. But I think that where you're going with this is exactly a big part of when we talk about care intellect. The perinatal example is one of those where we're connecting all this information and serving it up in a way that makes it very easy to use for that caregiver. So in the case you brought up would be in the cardiology world, perinatal play is obviously in labor and delivery. But I think you're going to see more and more of these departmental solutions come out from us here in 26 under the branding of Care Intellect. So thanks for the question.
Operator: Thanks, guys. Thank you. Our next question is from Vijay Kumar with Evercore ISI. Please proceed.
Vijay Kumar: Hi, guys. Thanks for taking my question, and congrats on the next sprint here. Pete, maybe my first one for you. And I saw you guys signed a distribution agreement with the CDL on your pharma diagnostics side for Cato. Is, you know, my understanding was CDL represents maybe or serves half the U.S. market. Is that the right assumption? Have they started shipping this product, and do they have the capability to ship this on weekends? I'm curious on how the partnership is evolving.
Peter Arduini: Yeah, no, look, CDL and their group, CardioNavex, is a large part of the U.S. pet market, and they actually have a full distribution reach into individual cardiology offices, typically with rubidium. But our strategy is working along with them is to obviously convert many of those customers over into Forcado. We're just getting started. As you know, we announced earlier this quarter, it typically takes a 60, 90 day window cycle to move through. But all of the customers that have seen it on their side are very excited about it. I think the economics, the clinical capabilities, all of those play out to be a really positive And so, you know, a higher percentage of that conversion of that group moves us very close along our goals that we've laid out over the medium term of half a billion dollars. And so they're a key part of it and starting out quite well.
Vijay Kumar: Understood. And then just my related question on, I'll just look at your Aikman book to build, capital book to build, if you will. last seven quarters uh you've ranged at around 1.12 um and i know fiscal 25 uh some of the revenue recognition was impacted by by timing of delivery which was pushed out so when you look at 26 uh pete is is there anything unusual about uh delivery dates on on these orders Any change in cancellation trends or cancellation trends been stable? Thank you.
Jay Saccaro: Yeah, Vijay, we're definitely happy with the performance in terms of equipment book to bill, in terms of overall book to bill, in terms of record level of backlog. And then importantly, this trailing four quarters orders growth, which we think is perhaps the a better indicator of performance than looking at on a quarterly basis. And so as we approach 2026, we think the setup is pretty good. We guided to approximately 3% this year. We will, you know, there's a lot of work to be done to finalize our plan, but our expectation is we'll grow faster than that next year. And a lot of that comes down to the strength of the capital book that we currently sit on today.
Vijay Kumar: I'm just sorry, on cancellations, Jay?
Jay Saccaro: Cancellations is normal levels. We haven't seen any major changes in those cancellation rates, Vijay.
Operator: Thank you. Thank you. Our next question is from Matt McSick with Barclays. Please proceed.
Matt McSick: Hey, thanks so much for taking the question. So one follow-up on the sort of rolling of some of these new systems next year, proton counting and total body. Just wondering if you could, I know it's the 26th question, but talk a little bit about for a launch, for launches like that, mid-year and end of year, you know, what does that look like in terms of, you know, Capturing orders, capturing interest, building a pipeline, you know, ahead of that, understanding that your customers are aware that these are coming also. And just, you know, what's the shape of that? And then I have one quick follow-up.
Peter Arduini: Yeah, Matt, obviously each of the products is unique based on their regulatory approval file. Some might be approved in Europe first, some might be in the U.S. So there's a little bit of a mix of that. But the first part is to be able to make the announcement and get customers understanding when it's coming. To your point, there are certain products like Full Body Pet and Photon Counting, we've been more transparent, that are coming. And so a big part of this is when they come out is you know, if they already have an order for an existing system and they want to upgrade to the other, how can you do that? You know, many of our design features have been done so that the footprint matches the predicate product the best it can. So there's minimal site disruption that can help with faster turnaround. In most cases, we've done that with our products that were coming out. But we typically, you know, have a fleet discussion with our big customers about You know, what products do you have? How are you evolving your products? This is a big part of what our field teams do a very good job with. And having customers be thinking about what budgetary dollars that they need to be having, thinking about which products probably need to be upgraded based on age, but also based on what you want to do. I think back to the question about EP, if that's a focused plan for you, what are you going to be doing with your fleet? So in many cases, customers have been already thinking about that, but until we actually announce it and give dates on availability, which RSNA for us tends to be one of those milestones in radiology, that's when people really then start doing the final planning.
Matt McSick: Got it.
Peter Arduini: Okay.
Matt McSick: So for at least maybe one of these, that might be next year at RSNA, and then that kind of makes it official, from what you're saying, that sounds like. And then, I mean, one of the things, I don't want to, go ahead, I'm sorry.
Peter Arduini: This year at RSNA, we're going to, you know, talk a lot about all of our big launches. So, I would say, you know, expect to hear, you know, a good dozen of high-impact products that we'll be talking about at RSNA.
Matt McSick: That's great. Look forward to it. And just, I know this is AI is one of these big, broad topics that means a lot and nothing sometimes at the same time. But I really admire, I think, a lot of folks recognize how much work he's done on approved software as device applications and rollout and investment in this area. In the results that you're printing and the growth that you're showing, where and when and how do you think this is playing through your growth and engagement with your customers? Is it in growth? Is it in, I don't know, defensive ability to defend accounts, go deeper in accounts? Just a general, where do you see the value that you've invested playing out in the economic returns and growth in your business?
Peter Arduini: Yeah, Matt, I'll just give you two quick examples. One is AVS this quarter. You're seeing it. It's loaded all of these products with different artificial intelligence capabilities that result in superior performance versus competition. So we actually are getting better price and higher capture rate. So if you look at this quarter, we were actually up in margin as well. That's also due to the redesign that we've had to leverage what we've called platforming. So the combination of those two together has been able to enable that. The second phase, and then all of these new products, like the ones I mentioned for RS&A, are going to have that same type of AI inside. This Care Interact platform is a big deal for us because this is where we start actually having a departmental solution that starts connecting multiple modalities or multiple data flows to bring kind of longitudinal solutions. And so we're just entering into that phase. This labor and delivery is the first one. But I would argue relative to broader SaaS and standalone applications, that's really our first wave that we're going to see bigger capabilities coming out there. And again, price and added capture rate where we're winning share. Typically, it comes back to a really good device. But honestly, the AI and the software components of it making the differentiation in the eyes of customers. I don't know, Jay, if you'd add anything.
Jay Saccaro: Yeah, sure. At the investor day, Matt, we talked about digital revenue expanding from $1.2 billion to $1.8 billion by 28. And we're well on track with respect to that. It remains an important growth engine. And I would say implementation is going really well. Notably, we went from 85 AI-enabled FDA device authorizations last year to 100. So we're pleased with where we sit with AI-enabled devices. It's an important unlocker. But what we're seeing is, as Pete said, a lot of this is just a great way to differentiate our portfolio of products. That's great. Thanks for the call, Eric.
Operator: Thank you. Our next question is from Robert Marcus with JP Morgan. Please proceed.
Robert Marcus: Oh, great. Thanks for taking the questions. Two for me. First, I want to start with the high-level question. It's about a year since you gave the long-range plan at the Analyst Day last November. Just wondering, you know, one year in, how you think you're stacking up versus it? Do you feel like you're still on track? And any puts and takes you want to highlight as we just think about the outlook on growth and margins?
Peter Arduini: Yeah, Robbie, thanks for the question. Look, I think relative to mid-single-digit growth, as I've mentioned before, we feel quite good about the ability to be able to achieve that. This year, there's been added complexities with tariffs and things that we're navigating through, but we're navigating that well. And so from a margin standpoint, to be in that 17 to 20% plus range, we also feel very good about. I think the underpinning of that is what we're being able to do within the field with our commercial teams. I think our go-to-market Execution has been very good, both in large enterprise deals and individually at the street level. Some of that then comes back to this product portfolio. You know, what we said and when we would launch products, we're right on to those dates. Whether it be on the pharmaceutical side or be on the device side, all those are lining up as we laid out back in that investor day back in November. So again, it's one of the reasons that we're very excited about this RS&A, the big radiological meeting in Chicago, December 1st and 2nd, because that's going to showcase many of the products where we had some, honestly, gaps in the portfolio. And secondly, how those gaps are not only filled, but we come out with a product that's actually significantly different than what competition has. So that's kind of where we stand there, and we feel quite good about it.
Robert Marcus: Great. Really helpful. One quick follow-up on Flercato. Sounds like it's going a little slower this year. Still confident in the long run. Maybe you could just give us a little more on what GE Healthcare can do to help streamline the workflow conversion. There's obviously a change at the hospital level on what they need to do and how to source it. So maybe just help us on what investments you're doing to help advance that. And do you think you could be back on track to your goals in 2026? Thanks.
Peter Arduini: So the short answer is absolutely back on track to our goals in 2026. And it starts with the opportunity funnel, meaning people that want to buy and convert to Flicato is much larger than we initially envisioned. So that's point one. And again, why is that? That comes back to anyone that sees this product, it says from an image quality standpoint, and its ability to aid diagnosis is second to none. So it starts with that. I think the economics now are clear on the private pay side as well as on the Medicare piece. And as far as how the models work, They actually work quite well for customers. So all of those things are in place. And as I previously mentioned, getting the CMOs running, we have the recipe. But now the recipe is kicking in place to have 95% plus. Between now and the end of the year, we're going to ramp that at the right level of speed. So again, what does that mean? Well, you get a customer new customer in, and they might be only doing one to two patients. You want to have those one to two patients have great, great experience. And then maybe 60 days in, they move to 12 to 15 patients. And that ramp can happen very, very quickly once they have their process in place. The processes, you know, Robbie, are no different than what you would think in other areas. You know, when you have a new product you bring in and a drug, you want to do your first billing to your private payers. Do you get the billing back? That process is working. Well, your flow about how you actually do the reads. So your cardiologist in your department referring for these procedures, the right software on the systems. Those are the things that we now have a really tight structure in place to bring people up. In the case of like CDL, they have all that in place. So their ramp is actually a much faster capability than someone, let's just say, that's new to the area. or had an oncology practice, and now you're bringing up as a cardiology practice. So we're very confident that our ability to ramp this. And again, the most important thing is, do customers look at this and say, it's a game changer? And so I think that's the key. And then lastly is, you know, the cardiology, the ACC came out with guidelines that basically say, this is the best direction to go for myocardial perfusion. So we've got all of those tailwinds. And again, the conversion factor here I think will ramp up rather quickly. But we wanted to obviously kind of lay out where we actually are for the year and talk about why it's so important to do this the right way and be deliberate. Because in the long run, you know, this has clearly the potential to be a billion-dollar drug at some point over in the future.
Robert Marcus: Thanks a lot. Appreciate it.
Operator: Thank you. And our last question comes from the line of Anthony Petrone with Mizuho Americas. Please proceed.
Anthony Petrone: Thanks, and congrats on the quarter here. I'll stick with Flerkato and one on tariffs. Maybe, Pete, to expand, you mentioned a larger PET and maybe possibly PET-CT backlog. Maybe, you know, how much of that is being driven by Flerkato and Does the existing install base within GE of PET-CT systems, does that support this getting to a billion dollars, or do you need some of that on the capital side to be released in order to sort of, you know, let Florcado flourish here a little bit? And then quickly on tariffs, it stood at a net negative 45-cent headwind for this year. You know, all else equal, the company was talking about mitigation efforts into 26th. how much of the negative 45 can be offset into 2026? Thanks.
Peter Arduini: I'll take the Fricado piece, and then maybe, Jay, you can touch on the second part on the tariffs. I think, look, without adding any more pet systems, and I think I mentioned this prior, is that if we were to just take 25% of the current pet myocardial perfusion market, just 25% of it, That's roughly a billion dollars of furcado revenue without one other scanner added, and those are already in cardiology. To your other point, though, we are seeing the amount of PET systems increasing. Now, some of that is in cardiology for sure, but some of it's also across the board in oncology because of the new molecules that are coming up, some of the new diagnostics capabilities that we actually have as well. So we're seeing both of those. But I think to your point, it's super important to understand just with a quarter of the conversion of the pet MPI today away from rubidium to furcado, that gets you to a billion dollars. Which again, why it's so important that you manage the ramp appropriately and customers have a world-class experience. When they do, the ability to convert a higher percentage of their patients over can happen rather quickly. Yeah, sure.
Jay Saccaro: Quickly on tariffs. Overall, as you noted, we're $265 million in tariff impact this year. We expect less than that next year. We're going through our planning processes right now to get the fine-tuned answer in terms of what the impact will be, but it's safe to say it will be a tailwind. We're looking at things like structural changes to supply chain continuing to work on USMCA certification, using free trade zones, and then, of course, some selective pricing. But working together, we expect tariffs to be a tailwind next year to earnings growth.
Operator: Thanks. And that concludes our Q&A session for today. Please proceed with any closing remarks.
Peter Arduini: Just thanks, everyone, for joining today, and we look forward to connecting with you, those that will be attending the RS&A or one of our upcoming conferences. Thank you.
Operator: And this concludes our conference. Thank you for participating, and you may now disconnect.
