Hologic Inc (HOLX) 2004 Q2 法說會逐字稿

Good evening, and welcome to the Cytyc Corporation second-quarter earnings conference call. At this time, all parties have been placed in a listen-only mode, and the floor will be open for your questions following the presentation.

It is now my pleasure to introduce your host, Ms. Anne Rivers, Investor Relations Manager of Cytyc Corporation. Ma'am, the floor is yours.

Thank you. Good evening, everyone, and welcome to Cytyc Corporation's second-quarter conference call. If you have not received a copy of the news release issued after today's close, please call The Ruth Group at 646-536-7010, and one will be faxed to you.

The following presentation will include forward-looking statements within the meaning of the federal securities laws. including statements about the Company's expected sales performance, operating results, financial condition and business strategy. These statements are subject to a number of risks and uncertainties, including those detailed in the Company's press release issued today, and in its Form 10-K and other filings with the Securities and Exchange Commission, that could cause actual results and outcomes to differ materially from those projected in the forward-looking statements. Please remember that these statements speak only as of today's date, and that you should not place undue reliance on them. In addition, please note that this call is being recorded by Cytyc Corporation, and is copyrighted material, and cannot be rerecorded or rebroadcast without the Company's express permission, and your participation implies consent to our taping.

With that, I'd like to turn the call over to Patrick Sullivan, Chairman, President and Chief Executive Officer of Cytyc Corporation.

Thank you, Anne, and good evening, ladies and gentlemen. I would like to welcome you to our teleconference to report of the performance of the Company for the second quarter, ended June 30, 2004. Joining me on the call today are Dan Levangie, Executive Vice President; Leslie Teso-Lichtman, VP and Acting Chief Financial Officer; and John McDonough, SVP, Development and Operations.

During this evening's call, I'll provide an overview of the business for the quarter, and then turn the call over to Leslie for more detail on our financial performance. Dan and John will then provide an update on various aspects of our ThinPrep and NovaSure businesses.

We delivered an excellent second quarter and first half of 2004, and we are well-positioned for another year of achievement, based upon our strong financial and operating performance in the second quarter. As noted in our press release, revenues for the second quarter of 2004 were $99.5 million, with net earnings of 21.9 million or 19 cents per diluted share. Our growth initiatives are now hitting on all cylinders. During the second quarter, we shipped our 100th ThinPrep Imaging System, and since we received FDA approval in June of 2003, we have shipped over 1 million ThinPrep Imaging System slides to customers.

We are way ahead of our original ThinPrep Imaging System expectations, and we expect to have an installed base of between 160 and 170 units by the end of this your. Earlier this month, the ThinPrep Imaging System was designated a winner of an R&D 100 award. We are delighted about the accolades and reviews we are receiving from laboratory customers, gynecologists and independent judging panels about our breakthrough technology. Our imaging program has come a long way in just 12 short months. Last year at this time, we had only shipped our first unit to our first customer. One year later, we have now 100 imaging systems in the field, and are very excited about the prospects for our ThinPrep Imaging System this year and next.

As you will hear Dan and John discuss later in the call, the integration of Novacept into the Cytyc organization is progressing quite nicely. NovaSure sales during the quarter exceeded our expectations, and we are quite pleased with the progress we have made. This acquisition really builds on our reputation and leadership position in providing innovative devices for women's health.

Finally, as you will hear throughout the call today, we believe this acquisition, along with other growth initiatives, including the ThinPrep Imaging System and international opportunities, will put us on a strong financial growth trajectory on both the top and bottom line for the foreseeable future.

We continue to evaluate a number of opportunities to continue to leverage the strength and significant capabilities of our sales and marketing presence in the OB/GYN offices and laboratories, and are very excited and optimistic about some of those prospects. We remain focused on our goal of achieving $1 billion in revenue by 2008, and becoming the premier women's health company, delivering innovative products for a variety of medical applications.

I'd like to know turn the call over to Leslie for the financial highlights of the second quarter, ended June 30. Leslie?

Thanks, Pat. My remarks today will compare the financial results of the second quarter of 2004 with the results of the second quarter of 2003. I will also provide selected comparisons to the first quarter of 2004. My comments will be focused primarily on our diagnostic products business, which includes the ThinPrep System and FirstCyte Breast Test, and then John McDonough will discuss our surgical products business, mainly the NovaSure system. Additionally, we will be giving guidance for the third quarter and full year 2004. In compliance with the SEC's regulation FD, this guidance is being disseminated simultaneously to all parties. Further, as noted at the outset of this conference call, we further caution that the Company's guidance is forward-looking in nature, and subject to risks and uncertainties which could cause actual results to differ, including without limitation the risks detailed in the press release we issued earlier today and in our SEC filings, including our 2003 Form 10-K and our most recent 10-Q.

Total worldwide revenue for the second quarter of 2004 was 99.5 million, an increase of 30 percent from the second quarter of 2003. Total revenue from our diagnostic products business for the second quarter 2004 was 81.5 million, an increase of 4.8 million or 6 percent from the second quarter of 2003. Domestic revenues totaled 70.8 million, an increase of 1.6 million or approximately 2 percent, and international revenues totaled 10.7 million, an increase of 3.2 million or 44 percent.

Exchange rate variation from the second quarter 2004 compared to the second quarter 2003 accounted for approximately 600,000 of the 3.2 million international revenue increase. Excluding the effects of the varying exchange rates, international revenues were up 36 percent, primarily as a result of increasing sales of the ThinPrep Pap Test. Revenue from domestic shipments of ThinPrep 2000 and 3000 instruments was approximately 700,000, and we placed 68 new instruments in the second quarter. Revenue from domestic shipments of Non-Gyn products was approximately 2.6 million, and was 8 percent higher than the second quarter of 2003.

Revenue from domestic sales of ThinPrep Pap Tests, including imager ThinPrep kits, was approximately 66.1 million, an increase of 2.5 million or 4 percent from the second quarter of last year. Second-quarter 2004 average selling prices increased 3 percent, compared to the second quarter of 2003, primarily due to higher pricing for imager disposables. Shipment volume levels, which were 9 million tests, were approximately equal to the second quarter of 2003 and the first quarter of 2004. Second-quarter ThinPrep Pap Test revenues of 66.1 million were approximately 1 million higher than the first-quarter 2004 ThinPrep Pat Test revenues of 65.1 million. Average selling prices were higher in Q2 compared to Q1, again related to the imager ramp-up. Large laboratory accounts were 55 percent of total ThinPrep Pap Test shipments in the second quarter 2004, down 3 percent from the first quarter 2004, and all other lab accounts were up 3 percent.

The second-quarter overall company gross margin rate of 78 percent was in line with our expectations and previous guidance. This was approximately 2 percent lower than the gross margin rate in the second quarter of 2003, due primarily to the NovaSure product, which carries lower margins, and a larger percentage of international sales in the quarter, which also carry lower margins compared to the ThinPrep Pap Test in the United States.

Total company operating expenses were 41.5 million, 9.8 million or 31 percent higher than the same period last year. Research and development expenses of 5.3 million were 1.5 million higher, due to continued development of enhancements to the imaging system and development of the second-generation RF controller at our surgical products business.

Sales and marketing expenses of 27.4 million were 30 percent or 6.3 million higher than the second quarter of 2003, largely as a result of costs at our surgical products division acquired in March 2004, international expansion following the UK NICE committee recommendation in the fall of 2003, and increased selling and customer training efforts to support the increasing demands for the imaging system.

G&A expenses of 8.8 million were up 29 percent from 6.8 million in the second quarter of 2003. This increase is due to legal costs related to litigation and administrative costs at our surgical products business acquired in March 2004. Our operating margin was 36.3 million or 37 percent of sales, compared to an operating margin of 29.7 million or 39 percent of sales in the comparable quarter of 2003.

The effective tax rate in the quarter was recorded at 37 percent. Consistent with our prior guidance, we expect the effective tax rate for the full year 2004 to be 38 percent. Second-quarter earnings were 21.9 million or 19 percent higher than last year's earnings of 18.4 million, and fully-diluted earnings per share was 19 cents, up 19 percent from 16 cents per diluted share in the second quarter of last year.

We believe third-quarter 2004 total worldwide revenues from both of our businesses will be in the range of 101 to 103 million, with fully-diluted earnings per share in the range of 19 to 20 cents. We expect gross margin rates to be approximately 78 to 79 percent, and operating margins to be approximately 37 to 38 percent.

Moving to the balance sheet, accounts receivable totaled 58.5 million, 16.5 million higher than the fourth quarter 2003. Approximately 6.6 million of the increase related to receivables acquired from Novacept, and the balance was growth in sales.

Days sales outstanding of 52 days was approximately equal to the first quarter of 2004. Inventory levels of 23.5 million increased 5.7 million, due largely to approximately 4 million of inventory acquired from Novacept, and the balance from imager production. Inventory turnover was 3.6 turns, compared to 4.1 in the fourth quarter 2003.

Our cash, cash equivalents and investment securities decreased from the end of the first quarter by 74.5 million to 146.1 million as of June 30, 2004, due largely to payment of the balance of the aggregate purchase price for Novacept, which was disbursed in April. We expect to use our existing cash and investments plus incremental cash generated for strategic investments to repay debt or to repurchase Cytyc stock.

For 2004, we believe our domestic diagnostic product revenues will be in the range of 290 to 300 million. We expect revenue from our ThinPrep Pap Test business, including imager kits, to be in the range of 270 to 280 million, representing unit shipments of 36 to 37 million tests, and that AUPs will continue to improve as imagers are placed. Outside the United States, we expect revenues to grow 25 to 30 percent in 2004. Our international revenue in 2003 was about 32 million, and we believe 2004 will be in the range of 40 to 45 million. We believe about 30 percent of the increase in revenue will be attributable to the UK conversion, and the remainder from growth in other markets.

We believe total worldwide revenues for 2004 from our diagnostic products will be in the range of 330 to 345 million. We expect total company gross margin rates to be in the range of 78 to 79 percent during 2004, as we continue to build our service and manufacturing organization to support the imager plant. We are targeting a total year operating profit rate in the range of 38 to 39 percent for both of our operating businesses combined.

We are delighted with the financial performance of the Company in the second quarter, and we are proud to report that we are successfully executing on the growth initiatives we have described to you over the past several months.

I would like to now turn the call to Dan Levangie.

Thanks, Leslie. Today, I'll report on the commercial progress that we made during the quarter in the four major segments of our business -- the core US ThinPrep Pap Test business, our international business, the ThinPrep Imaging System and our nearly acquired endometrial ablation business, based upon the NovaSure system.

In our core US ThinPrep business, Q2 2004 was a very strong quarter for instrument placements, with a total of 115 additional ThinPrep processors installed worldwide -- 68 instruments in the United States and 47 in international markets. Of the 68 instruments placed in the United States, 27 of these were in new customer laboratories. This brings the total worldwide installed base to slightly more than 3,000 ThinPrep processors, and reflects the continued conversion of the marketplace to the ThinPrep Pap Test. While our penetration level in the United States has currently reached a plateau, we continue to see growth opportunities in both the large lab and all other lab segments. As reported last quarter, we believe total ThinPrep Pap Tests for calendar year 2004 to be in the range of 36 to 37 million tests, and we expect accelerated adoption of the ThinPrep Imaging System, which is driving higher average unit price, to leave total revenue consistent with earlier guidance.

In our international business, we continue to focus on success in the United Kingdom with ThinPrep. In Scotland, full conversion of the ThinPrep Pap Test was accomplished last quarter. Now, all women participating in the Scottish screening program are provided an improved quality of care with the ThinPrep Pap Test. In England, the conversion process is underway. During the quarter, we announced that, of the 12 regions in United Kingdom, two of the largest regions have chosen to convert exclusively to ThinPrep. These two regions, Southwest and Southeast East (ph), together represent more than 700,000 tests per year, and we expect to announce other regional wins in the near future.

We were of course disappointed to learn of the decision made by the Wales cervical cancer screening program that they had chosen another provider of liquid-based pap tests for their program. The program in Wales is one of the smaller segments of the entire UK program, and represents approximately 200,000 tests per year, or about 5 percent of the total national screening program. Overall, we believe that we will achieve a similar level of penetration in the UK as we have in the United States. We expect that during the remainder of 2004, more and more regions will complete their selection process, the training schools will fully convert, and will begin offering training to other regional labs. And we expect that during 2005, the momentum for widespread conversion of the UK program will accelerate. As we reported last quarter, we continue to see great potential for our business in Germany and in France, and are cautiously optimistic regarding reimbursement in France beginning in January 2005.

Another area of excitement for us is in China. We've had operations in China for more than three years now., through our distributor, and are beginning to see substantial growth in this market. Sales of ThinPrep in China this year will exceed $4 million, and have been growing since 2002 at a compound annual growth rate of more than 130 percent. We will continue to support our partner in this market to capitalize on the enormous potential represented there. As we reported last quarter, we expect that international revenues will grow to approximately $40 to $45 million during 2004.

We continue to be excited by the success and the milestones we achieved during the quarter with the ThinPrep Imaging System. Last quarter, we revised our schedule of imager shipments during 2004 by raising our projection from 100 systems up to 125 to 130 systems. We made great progress toward this objective this quarter. During the quarter, we shipped 45 systems and received letters of acceptance for 39. We believe the nature of the summer work schedule will slow the rate of imager shipments during Q3 2004 somewhat. However, we are revising our earlier guidance upward to a total of 130 to 140 total shipments during 2004.

As we reported in our press release, by the end of the quarter we had achieved a very significant milestone by shipping our 100th ThinPrep Imaging System. Since approval in June 2003, we have shipped a total of 100 systems, and have received letters of acceptance making 74 of those systems revenue-generating at this time. By any measure, the ThinPrep Imaging System is setting a new standard for screening ThinPrep slides.

We also made great strides during the quarter on the reimbursement front. During the quarter, we confirmed that increased reimbursement is in effect in plans representing another 24 million covered lives, bringing the total covered lives to approximately 178 million. We continue to see reimbursement to our customers under this code, and are working with customers to confirm additional coverage.

In summary, we believe we have introduced a major advancement to cervical cancer screening with the ThinPrep Imaging System that will significantly improve quality and reduce overall cost. We are confident that we'll achieve our revised shipment goal of 130 to 140 systems by year end 2004, and predict revenues from sales of imager slides to be in the range of $16 to $20 million for 2004, up from 14 to 18 million reported last quarter.

We had a very strong quarter with NovaSure sales, in excess of $18 million. More than 80 percent of this revenue came from sales of single-use disposable units, and during the quarter, we sold approximately 19,000 disposable devices and more than 100 radiofrequency controller devices. We estimate that currently more than 4,000 physicians in the United States have been trained to perform NovaSure, and predict that by the end of the year 2004, more than 6,000 physicians will be trained users.

We currently have a sales staff of Cytyc Surgical Products specialists totaling 68 representatives, and our intention is to continue to recruit and hire until we have 100 specialists in the field. Each additional CSP specialist is being supported by the efforts of our Cytyc OB/GYN sales force, and that model is working very well.

In the UK, we are preparing for our market launch of NovaSure by training select members of our existing sales team to promote and sell NovaSure. In the UK, the NICE committee has recently recommended endometrial ablation as a cost-effective alternative to hysterectomy, and we believe that NovaSure can generate substantial sales in this market that we estimate has a potential of between $18 and $20 million per year. Our salespeople will begin selling NovaSure in late August in the UK, and we are optimistic about our potential there.

We are off to a very strong start with NovaSure, and our expanded presence in the field with our combined sales organizations gives us the reach to accelerate our core ThinPrep business and to create a new standard of care with the best-in-class NovaSure System.

I'd like to now turn the call over to John McDonough.

Thank you, Dan. The acquisition of Novacept was completed on March 24, at which time we formed the Cytyc Surgical Products or CSP division. The second quarter represented the first full quarter of earnings for the CSP division. CSP contributed $18 million of sales during the second quarter, representing the sale of over 19,000 single-use devices and approximately 110 controllers. Gross margins for CSP were in excess of 75 percent in Q2, ahead of our 70 percent target for 2004. Cost reduction efforts, coupled with higher manufacturing volumes, resulted in improved gross margins of our single-use device, and higher average sales prices resulted in improved margins on the controller. We expect gross margins to stay in the range of 75 percent for the remainder of 2004.

At the time of the Novacept acquisition, we reported that we expected sales of the NovaSure System for the remainder of calendar year 2004 to be in the range of $45 to $50 million. Last quarter, we increased our revenue expectations for 2004 to be in the range of $50 to $55 million. Due to better-than-expected sales productivity and growth in the size of the CSP sales force, we are again increasing our revenue expectation for 2004 to now be in the range of $55 to $60 million. Approximately 90 percent of the revenue is expected to come from the sale of single-use devices, with the remaining 10 percent expected from the sale of controllers. Approximately 3 percent of 2004 revenue is expected to come from international sales.

When you combine our expectations for the CSP division with our expectations for our diagnostic products business that Leslie mentioned previously, we expect total Cytyc revenue for 2004 to be in the range of $385 to $405 million, and for earnings per share to be in the range of 77 to 81 cents, up 1 cent from the our previous expectations of earnings per share, which were in the 76 to 80 cent range, and up 2 cents from the earnings per share guidance given at the end of last year. These earnings per share expectations exclude the one-time charges related to the Novacept acquisition.

We are pleased with the continued progress of the integration since the closing of the Novacept acquisition on March 24. The role of the Cytyc Surgical Products division is to continue all research and development activities related to the NovaSure product, to evaluate new product opportunities related to NovaSure, surgical products generally or other opportunities related to our women's health focus, and to manage operations related to the NovaSure product, including medical education, manufacturing and other support activities. Over 50 physician education seminars were conducted in the second quarter, and new development projects are underway. Morale across the Company remains high, and employee turnover in our CSP division has been low. The overall operation is now fully operating in the manner in which we envisioned. Our goal was to make the NovaSure System the standard of care for endometrial ablation. We are very pleased with the initial results of the CSP division, as our revenue expectations have increased and our integration plans are right on track.

In conclusion, we're confident that CSP will play a major role in helping us to achieve our goal of becoming the leading women's health care company, capable of achieving more than $1 billion of sales by 2008.

I would like to now turn the call back to Patrick Sullivan.

Thank you, John. Operator, we would like to now turn the call over for questions, please.

q-and-a

(OPERATOR INSTRUCTIONS). Tom Gunderson, Piper Jaffray.

Just a couple of -- before I get to the questions, just a couple of clarifications. I couldn't write fast enough. 18 million on NovaSure, over 18 million on NovaSure. And what percentage was coming from disposable units?

90 percent was coming from disposable units.

And then, the forecast of 55 to 60 million in calendar '04 -- what percent is coming from O-US?

Outside the United States is 3 percent.

And, John, as long as you've got the mike, CSP operating in the manner envisioned ties into my question on not only sales turnover but manufacturing, inventories, accounting systems, customer service, QA, et cetera, et cetera. Is that all integrated into the Cytyc way of doing things now?

It sure is. Turnover has been very low -- in fact, beating all of our estimates. That's clearly one of the leading indicators that we have been tracking in terms of success of integration. And from a systems standpoint, things are working very smoothly and right on track.

And then going forward, is there room for margin improvement in other product areas utilizing Costa Rica? Or is that going to stay just for NovaSure?

No. We are looking at the opportunity to take other products to Costa Rica, to help improved margins on other parts of our business. We're going through those evaluations now.

Thanks, Pat. And then 45 imagers shipped is pleasantly surprising. Were you surprised by the demand and the ability to ship, or can you give me a little more color on that?

We were -- I wouldn't say surprised; we were encouraged by the rate of new orders that we were able to process, and the manufacturing team stepped up and our manufacturing ramped up appropriately, and we were able to respond to that level of demand. So we were very pleased with the performance.

And backorder is about the same as it was at the end of the first quarter, Dan?

Yes, about the same.

And average contract length? Any change there, in the ones just in Q2?

No, it's anywhere from three to five years.

Okay. I think it was getting a little longer at the end of Q1. And it's staying at that rate?

Yes.

Wade King, Wells Fargo.

Congratulations on the strong performance in the quarter. A couple of questions, if I may. You mentioned a contract length in (ph) three to five years for imaging. Is your contract pricing still about the same as you reported in your latest conference call?

Yes. It hasn't changed substantially from early reports.

And in terms of the 45 shipments, you said there's 74 revenue-generating units now; is that correct?

Yes. At the end of the quarter, we had 100 instruments that we had shipped since the beginning of the program. Of the 100 that were out there, 74 had been trained, had gone through the validation process and signed off, and they are now generating revenue.

And is the time period -- you were working on trying to compress the time period a little bit between shipment, the training on the stain, the throughput analysis, all that, and then the lab signing off. It at one time, that was 90 days and you were working to compress that. Where is that now?

Actually, the team in the field has done a superb job with regard to that. In the past quarter, the interval there was 30 days.

30 days now from shipment to signing off?

To signing off; that's correct.

Well, that's a great performance. Can you comment at all on where we are as it relates to big lab trialing of the imager? Our impression has been that both of the two largest labs have been doing some work trialing your imager, and possibly other instruments. Where are you there?

As we reported last quarter, we have got a formal evaluation underway at one of the two largest lab companies. That evaluation is going extremely well, and it continues. And we are in discussions with both large lab companies about the imager currently.

Could you give us an idea on pricing -- update it, please, as relates to the NovaSure disposables and, for that matter, controllers, if you will comment on that?

Yes. In the quarter, the pricing held pretty firm on the disposable devices, in the range of $850, as we reported earlier. The controller pricing was about 16,000 average unit price. So consistent with earlier pricing.

And, Leslie, can I ask on the tax rate in the latest quarter, 37 percent, and then you indicated you expected an annual tax rate of 38. Was there something unique about this quarter that led to the lower tax rate? Was it related to Costa Rica? And if it was, why is that not going to -- the lower tax rate continue in the quarters ahead?

Wade, what we said back at Q1, we started off the year at the 39 percent tax rate, which was where we ended 2003. And back in April, on the conference call for the first quarter, we had indicated that we were going to begin to see some benefits from some tax planning initiatives that we began back in the late part of 2003, and that we would be bringing the tax rate down from 39 to 38 percent, and that we expected it to be 38 percent for the entire year. And so, in order to do that, where we had booked at 39 percent in Q1, we needed to book a lower rate in the quarter. But that will stabilize now going forward, but it has nothing to do with Costa Rica at this point.

And last question, if I could. Could you just talk a little bit about the core -- you've obviously got very strong growth in imaging and Novacept and internationally. And then the core US business, your bread and butter ThinPrep business, if you factor out the impact of, obviously, the increased reimbursement for the image slides, and your comments earlier about being in not necessarily a fully-penetrated market position but certainly on the upper end, where are you in terms of unit growth? You indicated you thought that actually, even though the large labs were down 3 percent of your core business, you indicated in your comments that you thought there were growth opportunities ahead in the large labs. Are you talking about just as relates to the imaging contribution? And can you clarify what is going on as relates to actual domestic ThinPrep units?

Quarter over quarter, it was pretty much consistent, the unit volume from Q1 to Q2. But we see opportunities to grow ThinPrep conversion in both large lab and the all other segment, and we've got programs certainly in place in the all other segment to address that. There still are conventional pap smears out there that are performed by some of our existing customers, and we are in the mode of attempting to convert those to ThinPrep. So there's still growth opportunity. We've reached a bit of a plateau here, but we think we can continue to have some growth quarter on quarter.

And is the guidance still -- I think your latest guidance was approximately 50,000 unit growth on a sequential basis in the domestic ThinPrep business. Is that something that you are still expecting, or any change to that?

I think we've seen it flatten out a bit here quarter on quarter. I think we could see growth in that range going forward, but maybe not as consistent as it has been in the past.

Glenn Reicin, Morgan Stanley.

A bunch of iterative questions here. On the 18 million for Novacept, how much of that was overseas?

3 percent.

Okay, so that was 500K. And then, from my calculations, you placed roughly 90 controllers. Is that a good number?

110.

And an average price, you're saying, of 16,000?

It was in the 15 to 16 range; that's correct.

So that number should be what as a total? About 1 million 2, 1 million 3?

That number would be --

Domestically. Sorry.

Yes.

1 million 3? Is that a good number? Okay. And then, a couple of easy questions. On the Non-Gyn and the instrument business, how much of those revenues is domestic versus international, for each one of those?

The majority of it is domestic.

Do you mind just giving me those numbers?

It's probably 90 percent, but I don't have -- I can look them up, if you have another question.

Yes, I do. I'm just trying to work through these placements, and tell me where my math is wrong. I thought we ended up the last quarter with 51 placements. So -- I think that's the right number, which means you actually placed 49, not 45 this quarter.

There's four that were placed internationally that are probably missing in your math.

And are those the first four that you've placed internationally?

Yes.

And then, if I work through sort of revenues from the imager alone, is 4 million domestic a good ballpark number? Was it a little bit less than that?

A bit less than that, right?

For the quarter?

Yes.

For the imager?

Yes, domestically.

It was probably actually a little bit higher than that.

Yes, it's higher than that.

So getting back to the core business, can you give us a sense of what you are getting right now for average price per test. It was around $7 last quarter domestically. This quarter, what is it?

It's around that number. It hasn't changed a whole lot.

So revenues there are, what, in the 62 -- well, I could back it out.

I think we gave it. It was 66.1 was the core.

Yes, 66.1.

-- was the core ThinPrep business.

And that was worldwide or domestic?

That was domestic.

Domestic. And you're saying, so we take out a little bit -- 4, between 4 and 4.5 for the imager, and that's the remainder?

Correct.

Correct. Okay.

David Lewis, Thomas Weisel Partners.

Again, in terms of imager metrics, we've asked most of them. You had talked about 50,000 annual paps per year as the target customer. Now that you've got 100 placements in the field, how is that number faring? And at what point do we tend to see saturation of a hospital or large laboratory that can do on an average basis 50,000 per year?

I think the units that are in the field are pretty consistent in that 40,000 to 50,000 test range. There's a wide variation from low levels up to more than 1 million tests at AmeriPath. But they are averaging in the 40 to 50.

And you see that continuing through 200 placements, 300 placements? And obviously, the marketing department has done some work on that. Is there a number where (indiscernible) becomes difficult?

I think, if you think of the total market as being somewhere in the US, it's somewhere between probably 800 and 1,000 units, with a couple hundred units potential at the large laboratories, and the balance being in the hospital lab segment.

No imager placements for 2004 forecast for the large clinical labs?

No.

In terms of gross margin, if the -- I know the payment cycle has been pushed out three to four years, maybe to four to five on the imager, but it still will have an effect on gross margins. You didn't mention that as pressuring gross margin in the quarter. Did the imager placements and the depreciation costs have any impact on gross margins? And how will that trend going forward?

No; that really wasn't an issue this quarter.

Is that just because the average contract life is now closer to five years?

It's averaging about four years.

And looking at the total guidance for 2004, it appears that you are still expecting a very dramatic fourth quarter. Is that the result of just traction in both the NovaSure and imager businesses, or is there something else that I may be missing?

I think it's imager, international and NovaSure.

The imager will have a large installed base out there for the entire quarter.

And then maybe a question for John. John, are you seeing, or are you concerned at all about a combination sterilization/ablation product? Have you started to think about combinations Cytyc can have, from a business development standpoint, to address that issue? Do you see a serious concern that needs to be addressed and, if so, when?

Well, we don't see it as a serious concern at all. It's interesting market opportunity in a very early-stage of market development, and we are watching it closely. And it's one of many initiatives that could make sense, but definitely doesn't show up on the radar screen under the category of threats at all.

Ryan Rauch, SunTrust Robinson Humphrey.

Just two or three quick questions. First, what were your T2000 or T3000 -- what was the revenue from T2000's and T3000's in the quarter?

It was 700,000.

And there's been a lot of noise about your competitor in a recent arrangement at one of the larger labs. Can you just walk us through maybe what you're saying? My understanding is that Quest's sales force is not yet trained with your competitor's product. Through the end of July, are you still maintaining your normal rates at Quest?

We saw no change during the quarter. The ordering pattern and the rate of ordering was consistent with earlier quarters, and their utilization rates that they report to us actually are a little bit up.

And can you just give us an update on your various sales forces or the combined sales force -- how many, maybe, you lost, how many you added and the total, both US and rest of world?

Yes. On the core sales force, it's pretty stable -- 100 salespeople calling on OB/GYNs, about 40 in the laboratory segment. On the NovaSure, the Cytyc Surgical Products side, we added some reps this quarter and finished the quarter at 68. As I said, we continue to recruit and we will be adding, taking that group to 100. So we'll have two sales forces of 100 each, one in the operating room, one in the physician's office. I think, in terms of turnover, Ryan, it was minimal turnover.

And then finally, you probably won't add much insight, but where do you stand with the litigation with your competitor? Is there any updates there?

No update.

Bruce Cranna, Leerink Swann.

A couple of things. These are some follow-up questions on some of the questions that have been asked already. But Leslie, just going back again to the ThinPrep number for the quarter of 66.1, including the image piece -- so it sounds like the math on the imager side for the quarter is somewhere around 3 million or so US; is that correct?

No, that's a little low.

So 3 to 4 was a better number? Or that was low?

That was a little low, too.

Let's try it this way. On a percent of slide, I think last quarter we talked about -- I think it was 3 percent of slides -- ThinPrep slides that had been imaged (ph). So it sounds like maybe 6 to 7, something like that?

Yes. It's here in the ballpark now; it's about 7 million.

I'm sorry? 7 million?

In revenue for the imager for the second quarter.

So that sounds like maybe 10 percent of slides. Is that a reasonable guesstimate? Again, I'm assuming sort of a flattish ASP for ThinPreps.

Oh, the upcharge only. Okay. If you are asking only about the imager upcharge, then you're correct. It's around 3.

And again, on sort of the 9 million slide number for the quarter, maybe 5 percent of those were actually moved onto the imager?

Yes, that's about right.

So looking at the back half of the year, I know you moved up your guidance. I think you said 16 to 20 from the imager. It seems like a bit of a steep ramp. Am I missing something, or -- I guess the question is, that percent of slides image number -- you anticipate that going up quite strongly? It's not so much the additional reimbursement changing?

It's not the additional reimbursement changing at all. It's all about the installed base game of placing the instruments in the field and having them crank out the revenue, once they have been installed. We've got 74 at the end of the second quarter. We've got a pull of 100 in the field. Those other 26 are going to come on here in this quarter, and those will be cranking in the fourth quarter. So it's all about the installed base and the recurring revenue.

And then just on the equipment line again, I think the number was 700,000 on 115 T2000's and T3000's. So has the ASP on that changed? Because my model -- can't we (ph) use a different selling price for that?

That 700,000 was domestic only on T2's and T3's.

Oh. What was the X-US number?

And that was 68 new instruments.

And can you give us the O-US number?

We had said that total international revenue for the quarter was 10.7 million.

Number of instruments.

And the -- was it 48 international?

Yes.

So I'd just assume a (technical difficulty) selling price? And lastly, on the NovaSure side, can you give us some sense as to, I guess, your message at the OB/GYN? I guess my question is, at this stage, do you find you are really focusing on swapping folks out of a competing ablation device, or is the message more you should really be looking at your overall hysterectomy caseload and maybe considering a different procedure there?

The answer is yes to both of those. I think we've seen a number of physicians that we've trained in this past quarter that had not yet performed any ablation procedures, and so they are new users of ablation. But we've also taken users of other competitive devices and made them NovaSure users. So I think it's coming from both sources.

Then can you tell us what sort of the breakout is between the new user for ablation in general in all sources?

I don't think we've got a good feel of that to give you any kind of percentage, Bruce.

We don't have that granularity yet.

Jayson Bedford, Adams Harkness.

I just have a few quick questions. Any contribution in the quarter from the UraCyte (ph) -- urine collection systems?

Minimal contribution.

And then, where do we stand with the full rollout of that product, and then what could that contribute in '05 to revenue?

The collection system itself has already been introduced to customers of Abbott's that are using their Probcept (ph). The preparation device itself has not yet been rolled out. So we are about halfway there, in terms of the product rollout. We've talked about revenue guidance or potential in '05, but we have not given any guidance.

And what's the revenue potential today (indiscernible) as a reminder?

We talked about the overall opportunity is about 1 million patients at 7.50 a test, about $7 million.

And then just on the NovaSure side, do you have an idea as to the installed base of controllers out there?

Yes. We've got about 600 radiofrequency controllers in the field today.

And then just a couple housekeeping. What was free cash flow and CapEx in the quarter?

In the quarter, we actually spent about 75 million, and that was related to paying out for the rest of the purchase price for Novacept, which we disbursed in April. So it was a cash used of 75 million was the change in the quarter.

Leslie, do you have a cash flow from ops number there?

I can get it. Essentially, what it is, it's these buckets is about 88 million that we spent for Novacept, and it's about 8 million invested in the imager, about 2 million in fixed assets. And then we had net income and some proceeds from stock options, which was another 25 million or so. Those are the buckets.

William Bonello, Wachovia Securities.

Just two questions. One, I just wanted to revisit the large lab penetration question. If you are holding your own at Quest -- I thought that's what I heard you say -- and total units were flat sequentially and the large lab penetration was down sequentially, can I assume, then, that you are losing share at lab core?

No.

No. I don't think you can assume that.

How do I reconcile the flat volume with a change in the percentage from large labs?

Well, lab core purchases in the second quarter and the first quarter of this year were approximately equal to where we were in 2003 for the first six months, so there has been no decrease there.

And then, I'm sorry, I did not catch when you said the percentage of slides that you were billing for imaging on -- I'm sorry, I wasn't sure if you had said that was 3 percent or that was 5 percent?

About 5.

About 5 percent, Bill.

Tom Gunderson, Piper Jaffray.

I'll try to be quick. Imagers that have gone to large labs for evaluation -- is there more than AmeriPath at this point?

Yes.

Can you elaborate?

We're doing an evaluation currently with one of the large laboratories.

Got it. And, kind of following along the idea of what's going on in the US on ThinPrep, can you help fill in the equation, Dan, as to 27 new processors, the 68 total processors and flat units? What's going on in the smaller labs that haven't converted yet, and you are doing a bake-off with your market share? And have you seen any increased success with a competitor coming into an established ThinPrep lab and taking away some of the business?

No, I don't think we've seen that, Tom. What we are targeting today -- we segment out our customer base. We understand their mix of either ThinPrep tests and conventional pap smears. We know that in our existing customer base, there are still about 4.5 million pap tests that are being done. So those seem to be the lowest-hanging fruit for us, and we've got programs in place to go after those pap smears.

Glenn Reicin, Morgan Stanley.

Just trying to put all the pieces here together; we've got a lot of stuff floating around here. In terms of placements, of the international/domestic placements, can you give us a breakdown between the T2000's and T3000's? So on the United States, of the 68, how much of that was 2000's versus 3000's?

We haven't broken it out in the past. It's 90 percent T2.

Are you starting to give those machines away?

Well, I wouldn't say give them away. We do have usage agreements where we place an instrument in return for a committed volume of tests at a particular price.

And then, when you talked about the $16 to $20 million guidance for the imager, that was just upcharge revenues, correct?

Correct.

So right now, what is the up charge that you are getting for the imager? I'm assuming it's around $7.

Right; that's a good assumption.

So it's still around $7. Okay.

Wade King, Wells Fargo.

I just wanted to be sure we got the right imager number, because there were a couple of things thrown out there. There was 4 to 4.5 and then 7, but I think you may have said, Leslie, that the 7 was upcharge plus the regular slide revenue, so --

That's correct.

Okay, so the imager revenue was approximately $4 to $4.5 million in the quarter; is that right?

No, it's more like 3.

3 and change, Wade.

Okay, 3 and change was the imager contribution on top of, obviously, the regular slide contribution? And is there any change to the amortization schedule on the imager? Is it still 16 quarters?

It's the length of the contract; and if they average four years, that the schedule.

Okay, good. And are your costs -- you've obviously made a lot of progress on the manufacturing side, compared to some initial constraints. Are there any significant constraints as relates to sole-source suppliers now, Dan? And secondly, as relates to your capacity to put out imagers going forward, any significant limitations there?

I would say, Wade, there's no significant limitations on our supply chain. We've been working it pretty closely over the last six months, and feel pretty comfortable with the relationships we have and the capacity and capability of our suppliers. So we can flex it up if we need to.

And is the imager capacity -- you talked about 50,000 to 75,000 slides per year. Is that still holding through the first wave of placements? And the 74 units that are out there, generating revenue -- what your experience to date?

I think it's in the 50,000 per unit range, but our expectation is that as we move towards higher-volume customers that that number will go up. And the imaging system has the capacity and capability to do that.

And when you say go up in that capability, is it 75,000 slides per year?

It's around 75,000 slides per year, today.

In terms of potential capacity. And is there anything to drive that up ahead, Pat, as you continue to trawl the imager at the large labs and try to meet their needs?

We obviously have engineering programs under way to improve our imaging system, both in terms of its performance in the field and other attributes that would potentially drive that up.

And how about on the cost side? This will be my last question, I promise. How about on the cost side? Originally, you had given us an estimate of imager costs and the amortization cost over the life of the contract would be around $150,000. Is that coming down now?

I think, initially, Wade, we indicated that it was around $200,000 and you'd amortize that over a four-year period. And that's how I got to my dollar per slide on 50,000 slides a year. We have programs and plans in place to address improving manufacturing costs from a materials and overhead perspective.

Maybe I misspoke there. Sorry. 200,000 -- is 150,000 in costs -- is that a reasonable objective over the next year or so, in terms of driving the cost down per imager?

I think I'd rather get back to you when we give the guidance at the end of the third quarter, with what we think next year's costs ought to be.

Is that like the check's in the mail, Pat?

Yes, something like that.

David Lewis, Thomas Weisel Partners.

Just too quick ones. Pat, not to beat a dead horse here, our model had 74 in the field instruments this quarter and 3.3 million of revenue. It sounds like that was pretty close, but for that to be the case, with the tremendous imager placements that you did in this quarter, is it safe to assume that a significant number of these placements came in the June month?

Yes.

The lion's share? Otherwise, I'm having trouble getting to this number, if we assume --

Yes; it was more than half, David, that came in the month of June.

The 74 number was at the end of the quarter, so obviously all of those units are not generating revenue for all of the quarter.

Okay, so you had a very strong June. Okay. That makes perfect sense. And then, just to go back to this ThinPrep issue that was already raised, my understanding is essentially large labs not growing, which means your growth has to come outside of large labs, which would drive large labs as a percent of revenue down and your pricing up. Is that essentially what happened?

(multiple speakers). That sums it up.

So that 3 percent you are referring to is the percent of sales coming from large labs?

Correct.

It's not sales down at large labs?

No.

No.

Great, just clarifying that. That's all I have.

Glenn Reicin, Morgan Stanley.

Trying to just nail down this imaging issue. On a weighted-average basis in the quarter, how many units were actually generating revenues? What's your best estimate?

I don't think we've done a weighted-average revenue generation.

Because what it comes down to, from my calculations, you are only doing about 9,000 disposables per installed unit per quarter right now. Does that sound ballpark?

I think, Glenn, the majority of the letters of acceptance for those 45 systems -- we have a total of 74 systems that have signed a level of letter of acceptance and that are generating revenue. In the quarter, the majority of the letters of acceptance came in the last month.

At the end of the first quarter, we had (multiple speakers) 35. So all of those 35 from the first quarter would have been generating revenue in the second quarter, plus a portion of the difference between 74 and 35.

So I know it's early in the ramp. So if you had to think of it in terms of coming up with a way of figuring out what percentage of placements in the quarter are actually generating revenues, and then the number of slides per instrument, what should we use as a good estimate? In other words, is it 10 percent of the units shipped in the quarter were actually generating revenues in that quarter? On average? (multiple speakers) For that current quarter. In other words, if you shipped 45 domestically, the average is four are really produced -- for the average of the quarter, four new units are producing revenues during that quarter?

I think typically what happens is you take the revenue producing at the end of, say, the first quarter. And you know that that's good for all of the second quarter.

For every month.

And then you would take those that were accepted in the second quarter and take a portion of that, maybe a third or a half, and assume that they are going to generate revenue or be revenue-producing, say, for half the quarter.

You know it's at least 30 days to the letter of acceptance.

And then what about the disposables per installed instrument? What should we assume? It's going to ramp up over time, but initially, what's a good number to use?

I would say on average, we've been seeing in the neighborhood of 50,000 -- 4,000 a month, in the 4,000 per month range would be a typical number.

We should take this offline, because I don't think the numbers work that way. I think it is less.

Final question, which is an easier one. Can you just break down on the international revenues what instrument sales were, ThinPrep, other and NovaSure? We said NovaSure was 500,000, but can you fill out the rest of it?

The instruments in the Non-Gyn were about 2.5 million out of the 10.7.

Can you break those down between instruments and Non-Gyn?

Yes, about 50/50.

50/50.

And you have sort of other, which -- you know, it is other. What were those sales?

Internationally, it was not material. The rest was all ThinPrep.

Operator, we have time for one more question.

Jayson Bedford, Adams Harkness.

One quick question for you guys. Just with respect to the large lab player trialing the imager, when you expect to get a definitive answer as to whether or not they will implement the technology?

We would hope by the end of this year, but it would be definitive when they tell us it would be definitive. We would hope to have something by the end of this year, but it's an evaluation.

Operator, I'll wrap up now. We are very pleased with our strong performance for the first half of 2004. As we discussed in today's call, our organization demonstrated excellent execution on our key growth initiatives in both the diagnostic and surgical divisions of the business. I believe we're well-positioned to become the worldwide market leader providing innovative products for women's health. Thanks for your participation on today's call.

Thank you. This does conclude this afternoon's teleconference. You may disconnect your lines and enjoy your day.