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PATTERSON COMPANIES, INC. (PDCO)·Q1 2025 Earnings Summary

Executive Summary

  • Q1 FY2025 net sales were $1.54B (-2.2% y/y), GAAP diluted EPS $0.15 and adjusted EPS $0.24; results were negatively impacted by the Change Healthcare cyberattack (~$0.06 EPS drag) and softer companion animal sales .
  • Dental internal sales declined 2.8% y/y with consumables -2.1% (ex-infection control -1.7%), equipment -2.4%, and value-added services -6.7% due to the Change Healthcare outage; Animal Health internal sales declined 2.8% with value-added services +8.3% .
  • Management reaffirmed FY2025 guidance at Q1 (GAAP EPS $2.00–$2.10; adjusted $2.33–$2.43) and initiated cost actions; later revised guidance lower in Q2 to GAAP $1.83–$1.93 and adjusted $2.25–$2.35, reflecting ongoing dental equipment softness and lingering Change effects .
  • Capital returns totaled $73.3M in Q1 ($50M buybacks; $0.26 dividend) with ~$450M repurchase authorization remaining; free cash flow improved modestly y/y on the company’s definition .

What Went Well and What Went Wrong

What Went Well

  • Dental AI/software innovation: Eaglesoft integrated Pearl’s AI “Second Opinion” for real-time detections, with deeper Weave integrations across Fuse/Eaglesoft/Dolphin to modernize practice workflows .
  • Animal Health value-added services strength: High single-digit growth driven by Turnkey ERP adoption, emphasizing software-enabled differentiation in production animal markets .
  • Cash returns and authorization: Returned $73.3M to shareholders in Q1; ~$450M repurchase capacity remained, supporting capital allocation flexibility .
  • Quote: “We recently announced the successful integration of Second Opinion… directly into Patterson’s Eaglesoft software… [and] new integration features within Weave… now the deepest, most complete data exchange available in the market” .

What Went Wrong

  • Dental value-added services revenue disruption: Change Healthcare outage prohibited claim submissions, cutting fee revenue and constraining software teams’ selling time; adjusted EPS included ~-$0.06 impact .
  • Companion animal pressure: Strategic mix shift away from low-margin business reduced top line and rebates, compressing margins intra-quarter .
  • Expense timing: Unexpected spike in medical claims (self-insured) and higher software investments drove OpEx deleverage, lowering adjusted operating margin by 110 bps y/y .

Financial Results

MetricQ3 FY2024Q4 FY2024Q1 FY2025
Net Sales ($USD Billions)$1.616 $1.723 $1.542
GAAP Diluted EPS ($)$0.52 $0.74 $0.15
Adjusted Diluted EPS ($)$0.59 $0.82 $0.24
Gross Margin (%)21.7% 21.5% 20.3%
Adjusted Gross Margin (%)21.6% 21.8% 20.1%
Operating Margin (%)4.3% 5.1% 1.9%
Adjusted Operating Margin (%)4.7% 6.0% 2.3%
Effective Tax Rate (%)23.2% 23.2% 23.6%
Adjusted Effective Tax Rate (%)23.3% 23.3% 23.7%

Segment breakdown (Q1 FY2025):

Segment / CategoryNet Sales ($USD Millions)Internal Sales Growth y/y
Dental – Consumables$344.1 -2.1% (ex-infection control -1.7%)
Dental – Equipment$133.9 -2.4%
Dental – Value-added Services$72.4 -6.7%
Dental – Total$550.4 -2.8%
Animal Health – Consumables$934.3 -3.0%
Animal Health – Equipment$25.4 -3.8%
Animal Health – Value-added Services$22.7 +8.3%
Animal Health – Total$982.4 -2.8%

Operating income by segment (Q1 FY2025):

SegmentOperating Income ($USD Millions)
Dental$27.1
Animal Health$25.4
Corporate-$23.1
Total$29.4

KPIs (Q1 FY2025):

KPIValue
Cash from Operations ($USD Millions)-$284.97
Capital Expenditures ($USD Millions)$13.51
Deferred Purchase Price Collections ($USD Millions)$271.83
Free Cash Flow (company definition) ($USD Millions)-$26.64
Share Repurchases ($USD Millions)~$50.0
Dividend per Share ($)$0.26
Revolving Credit Draw ($USD Millions)$134.0

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
GAAP EPSFY2025$2.00–$2.10 Reaffirmed Q1: $2.00–$2.10 Maintained
Adjusted EPSFY2025$2.33–$2.43 Reaffirmed Q1: $2.33–$2.43 Maintained
GAAP EPSFY2025$2.00–$2.10 $1.83–$1.93 (as of Q2) Lowered
Adjusted EPSFY2025$2.33–$2.43 $2.25–$2.35 (as of Q2) Lowered
Non-GAAP ExclusionsFY2025Deal amortization $29.1M ($0.33/sh) ~$29.9M; plus restructuring ($0.09), inventory prepayment write-off ($0.03), investment gain (-$0.03) Expanded
DividendQuarterly$0.26/share $0.26/share (Q1) Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 FY2024 and Q4 FY2024)Q1 FY2025Trend
AI/Technology in DentalPearl “Second Opinion” AI integration announced; ongoing software investments Eaglesoft integrated Pearl AI; deeper Weave integrations across practice mgmt suite Strengthening integration, execution progressing
Supply chain/macroElevated rates, inflation; equipment demand moderated; pricing pressure stabilizing in scanners Macro still challenging; consumables steady; equipment down; back-half weighted EPS Persistent headwinds; cautious near term
Cybersecurity (Change Healthcare)Q4 impact ~$0.04 EPS; transition to alternate claims processing Larger-than-anticipated impact in Q1 (~-$0.06 EPS); slower customer transition; some leakage Lingering impact, gradually improving
Dental consumablesAbove-market growth mid-single digits ex infection control; competitor disruptions added ~2 pts -2.1% y/y in Q1; cash flow timing + tough comp (UPS strike stocking in prior July) Temporary softness; expected normalization
Dental equipmentDown double digits Q4; cautious outlook; limited innovation cycle Internal sales -2.4%; digital positive; CAD/CAM/core down; innovation visibility limited Soft/lumpy; awaiting innovation tailwinds
Companion animalIntentional mix shift to profitability; low single-digit decline; margin expansion focus Mid-single-digit decline; rebate accruals pressured; expected normalization Transition phase; margins prioritized
Production animalStrong growth; omnichannel/value proposition Low single-digit growth continued; Turnkey traction Stable positive
Regulatory/legalN/A in Q3; Q4 highlighted risks including cybersecurity/AI Ongoing cybersecurity impacts; no balance sheet effects Risk acknowledged; operational mitigation
Corporate responsibilityNoted CR report release Highlighted 2024 CR report; DE&I/environment efforts Ongoing ESG communications

Management Commentary

  • CEO perspective on Q1 shortfall: “Our first quarter results fell short of our expectations, primarily due to… the Change Healthcare cybersecurity attack… lower sales in our companion animal business and the timing of certain corporate expenses.” Reaffirmed FY2025 guidance while implementing cost actions .
  • Cyber impact quantification: “Adjusted EPS of $0.24… includes a negative impact of approximately $0.06 per diluted share related to… Change Healthcare” .
  • Consumables and comps: July consumables weaker due to cash flow timing and tough comp from last year’s UPS strike stocking; underlying patient traffic steady .
  • Strategy and cost discipline: “Dedicated cost and management actions… pricing strategies and promotional effectiveness… prioritize investments in long-term growth and margin enhancement” .
  • AI/software emphasis: “Integration of Pearl’s Second Opinion… within Eaglesoft… improve diagnostic accuracy… deeper Weave integrations… modernize practices and enhance patient experience” .

Q&A Highlights

  • Guidance cadence and phasing: Back-half weighted EPS; improvement expected as Change Healthcare impacts abate and cost actions ramp in Q3/Q4; Q4 comp benefits from prior-year zero revenue cohort .
  • Dental consumables softness: Larger impact from Change Healthcare vs UPS stocking; customers’ reduced ordering tied to practice cash flow; consumables ordering expected to recover .
  • Companion animal margins/rebates: Mix shift hurt rebates in Q1; expectation to return to normal cadence through the year .
  • Customer retention with new claims processor: Some leakage to non-Patterson solutions; not a permanent loss of customers; monetization slightly lower on new platform .
  • Cost actions: Travel, hiring discipline, potential people actions; no quantified savings disclosed; balance between near-term margin and long-term investments .
  • Vendor contracting (Dentsply Sirona): Management declined to comment on specifics; emphasized Patterson’s value proposition and vendor relationships .

Estimates Context

  • S&P Global consensus for Q1 FY2025 revenue and EPS was unavailable via our system at the time of analysis; therefore, we cannot quantify Street beats/misses for the quarter (consensus unavailable).
  • Management reaffirmed FY2025 guidance at Q1, then revised lower at Q2 (GAAP $1.83–$1.93; adjusted $2.25–$2.35), indicating consensus likely shifted down post-Q2 to reflect lingering Change Healthcare impacts and softer dental equipment demand .

Key Takeaways for Investors

  • Q1 was a transiently weak print driven by external cyber disruption and strategic mix shifts; management maintained FY2025 targets at Q1 and initiated cost controls, but later lowered guidance at Q2, signaling conservative near-term expectations for dental equipment and value-added services .
  • Dental consumables demand should normalize as claims processing stabilizes and tough July comps pass; digital equipment shows pockets of strength, but broader equipment remains lumpy absent a stronger innovation cycle .
  • Animal Health is resilient: production animal continues to grow; companion animal is prioritizing margin integrity over low-margin revenue, with rebates and margins expected to improve as the year progresses .
  • Software/AI integration remains a strategic pillar and potential margin enhancer over time (Pearl AI in Eaglesoft; Weave integrations; Turnkey expansion), supporting differentiated value-added services across segments .
  • Capital allocation is supportive with buybacks and dividends; liquidity and revolver capacity provide flexibility amid macro uncertainty .
  • Trading lens: Watch for signs of claims processing normalization, consumables re-acceleration, and equipment order momentum into the back half; monitor vendor dynamics and the scale/timing of cost actions to gauge margin recovery trajectory .
  • Risk factors: Persistent macro/interest-rate headwinds, potential leakage from the Change Healthcare transition, and timing of innovation cycles could cap near-term upside; longer-term software/value-added services execution is the structural driver to track .