Hologic Inc (HOLX) 2004 Q3 法說會逐字稿

Good morning and welcome to the Cytyc Corporation third-quarter conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, Mr. Anne Rivers. Ma'am, you may begin.

Thank you. Good morning, everyone, and welcome to Cytyc Corporation's third-quarter conference call. If you have not received a copy of the press release issued yesterday, 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 yesterday, 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. It cannot be rerecorded or rebroadcast without the Company's express permission and your participation implies consent to our taping.

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

Good morning, ladies and gentlemen. I would like to welcome you to our teleconference to report on the performance of the company for the third quarter ended September 30, 2004. Joining me on the call the day are Dan Levangie, Executive Vice President; Leslie Teso-Lichtman, Vice President and Acting Chief Financial Officer; John McDonough, SVP Development and Operations, and Tim Adams, who will assume the position of CFO on November 8.

During this morning's call, I will provide an overview of the business for the quarter and turn the call over to Leslie for more detail on the financial performance. Dan and John will then provide an update on various aspects of our ThinPrep and NovaSure businesses. John will conclude his remarks by providing guidance for 2005.

We delivered an excellent third quarter and first nine months of 2004, and we are well positioned for yet another year of achievement based upon our strong financial and operating performance in the third quarter.

As noted in our press release, revenue for the third quarter of 2004 was $102.8 million with net earnings of 24.8 million or 21 cents per diluted share. Our growth initiatives are now in full stride. During the third quarter, we shipped 28 ThinPrep imaging systems and now have an installed base of 128 systems. We believe we are on track to have an installed base of 150 units by the year end.

During the quarter, we signed a comprehensive agreement with Laboratory Corporation of America to implement the ThinPrep Imaging System throughout their entire laboratory network. NovaSure sales during the quarter were 19.7 million, exceeding our expectations. This acquisition really builds on our reputation and leadership position in providing innovative products for women's health.

Finally, as you will hear throughout the call today, we believe this acquisition along with our other growth drivers, 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 2005.

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. To support our growth initiative, yesterday we filed a $400 million shelf registration with the SEC to allow significant financing flexibility to our future corporate development activities.

During the quarter, we learned that we have been ranked number five on the Forbes magazine 2004 list of the "Best 200 Small Companies in the United States." The elite list is published annually and based upon a number performance criteria, including growth in sales, earnings per share and return on equity over a five-year period in the last 12 months. We are very pleased with this public recognition of our accomplishments.

During this quarter, we will start the relocation of our headquarters and manufacturing operations to our Marlboro facility. We expect to be completely moved into this new facility by February 2005.

And finally before I turn the call over to Leslie, we expect to release our Q4 and 2004 results in mid-February 2005. I would like to now turn the call over to Leslie for more highlights of our financial performance. Leslie?

Thank you, Pat. My remarks today will compare the financial results of the third quarter of 2004 with the results of the third quarter 2003. I will also provide selected comparisons to the second 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, namely the NovaSure system.

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 yesterday and in our SEC filings, including our 2003 Form 10-K and our most recent 10-Q.

Total worldwide revenue for the third quarter of 2004 was 102.8 million, an increase of 36 percent from the third quarter of 2003. Total revenue from our diagnostic products business for the third quarter 2004 was 83.1 million, an increase of 7.6 million or 10 percent from the third quarter of 2003. Domestic diagnostic revenues totaled 73.2 million, an increase of 5.5 million or approximately 8 percent, and international revenues totaled 9.9 million, an increase of 2.1 million or 27 percent.

Exchange rate variation from the third quarter 2004 compared to the third quarter of 2003 accounted for approximately 600,000 of the 2.1 million international revenue increase. Excluding the effects of varying exchange rates, international revenues were up 19 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 900,000, and we placed 47 new instruments in the third quarter. Revenue from domestic shipments of non-GYN products was approximately 2.6 million and was up 12.5 percent higher than the third quarter of 2003.

Revenue from domestic sales of ThinPrep Pap Test, including imager ThinPrep kits with the associated usage fees, was approximately 67.5 million, an increase of 4.5 million or 7 percent from the third quarter of last year. Revenue attributable to the imager upcharge was 4.9 million. During the quarter, we shipped 28 imagers and received letters of acceptance for 33 units. Approximately one-third of the 33 units, or the equivalent of 11 imagers, were generating revenue for the entire quarter. When added to the revenue generating units at the end of the second quarter, which totaled 77, the total revenue generating units in the third quarter was the equivalent of eighty-eight. When you divide that number into the 4.9 million in revenue, the revenue per unit related to the usage fee was approximately 225,000 per year. We believe that annual revenue for the Imaging System usage fee will be in the range of 225,000 to 250,000 per unit per year.

Imager usage fees are reflected in a higher priced disposable, and as a result, third-quarter 2004 average selling prices increased 6 percent compared to the third quarter of 2003. Domestic shipment volume levels, which were 9.1 million tests, were approximately 1 percent higher than the third quarter of 2003 and the second quarter of 2004.

Third-quarter ThinPrep Pap Test revenues of 67.5 million were approximately 1.4 million higher than the second quarter 2004 ThinPrep Pap Test revenues of 66.1 million. Average selling prices were higher in Q3 compared to Q2, again related to the imager ramp up. Large laboratory accounts were 56 percent of total ThinPrep Pap Test units shipped in the third quarter of 2004, up 1 percent from the second quarter of 2004, and all other lab account units shipped were down 1 percent.

ThinPrep Pap Test sales to our two largest customers, Quest and LabCorp, were consistent in the third quarter 2004 as compared to the same quarter of 2003, both in terms of volume and pricing. ThinPrep Pap Test sales to Quest and LabCorp together represented 23 percent of consolidated net sales in the quarter.

The third-quarter overall company gross margin rate of 79 percent was in line with our previous guidance. This was approximately 2 percent lower than the gross margin rate in the third quarter of 2003, due primarily to the imager rollout costs and a larger percentage of international ThinPrep Pap Test sales in the quarter, which carry lower margins compared to the United States. Total company operating expenses were 40.2 million, 9 million or 29 percent higher than the same period last year. Research and development expenses of 5.4 million were 1.2 million higher, primarily due to development activities at our Surgical Products business. Sales and marketing expenses of 26.3 million were 30 percent or 6.1 million higher than the third quarter of 2003, largely as a result of cost at our Surgical Products division and increased selling and customer training efforts to support the increasing demand for the Imaging System.

G&A expenses of 8.4 million were up 24 percent from 6.8 million in the third quarter of 2003. This increase is due primarily to legal costs related to litigation. Our operating profit was 41.3 million or 40 percent of sales compared to an operating profit of 30.2 million, also 40 percent of sales in the comparable quarter of 2003. The effective tax rate in the quarter was recorded at 38 percent. We expect the effective tax rate for the full year 2004 to be approximately 38 percent, excluding the nondeductible 19.1 million in process R&D charge related to the Novacept transaction.

Third-quarter earnings were 24.8 million or 33 percent higher than last year's earnings of 18.6 million, and fully diluted earnings per share was 21 cents, up 24 percent from 17 cents per diluted share in the third quarter last year. We believe fourth quarter 2004 total worldwide revenues from both of our businesses will be in the range of 107 to 109 million, with fully diluted earnings per share in the range of 21 to 22 cents. We expect gross margin rates to be approximately 79 percent and operating margins to be approximately 39 percent.

Moving to the balance sheet. Accounts Receivable totaled 61.5 million, 19.4 million higher than the fourth quarter of 2003. Approximately 9.9 million of the increase related to receivables at our Surgical Products division, and the balance was growth in sales.

Day sales outstanding of 52 days was approximately equal to the second quarter of 2004. Inventory levels of 25 million increased 7.2 million since year-end due largely to approximately 4 million of NovaSure inventory and the balance from imager production. Inventory turnover was 3.5 turns compared to 4.1 in the fourth quarter of 2003. Our cash, cash equivalents and investment securities totaled 178.9 million as of September 30, 2004. We continue to execute on the key growth initiatives we have described to you over the last several months, and we are proud of our employees around the world who have consistently contributed to Cytyc's outstanding financial performance as reflected in our results for the third quarter.

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

Today I will report on commercial progress that we made during the quarter in the four major segments of our business -- the U.S. ThinPrep Pap Test business, our international business, the ThinPrep Imaging System and our endometrial ablation business based upon the NovaSure system.

In our U.S. ThinPrep business, Q3 2004 was another strong quarter for instrument placements with a total of 69 additional ThinPrep processors installed worldwide, 47 new instruments in the United States and 22 and international markets. Of the 47 instruments placed in the U.S., 18 of these were in new customer laboratories.

During the quarter, we saw our ThinPrep Pap Test volume at each of our customer segments remain essentially unchanged from the previous quarter. Additionally during the quarter we were awarded a sole source contract for the United States Department of Defense, the DOD, to provide the ThinPrep Pap Test as the platform for surgical cancer screening at our Armed Forces cancer screening centers worldwide. The DOD negotiates contracts on behalf of the United States Army, Navy and Air Force.

As Leslie reported earlier, we shipped 9.1 million ThinPrep Pap Test during the quarter, which is in line with our expectations and consistent with our predicted level of sales going forward.

In our international business, we continue to focus on success in the UK. During the quarter, we announced that another region had decided to fully convert to the ThinPrep Pap Test. The London region representing 650,000 tests per year made their decision to convert exclusively to ThinPrep. This decision along with decisions reported earlier by the Southwest and the Southeast East regions represent five-year exclusive arrangements with fixed pricing and in total represent commitments totaling nearly 2 million tests or nearly 40 percent of the UK market.

As we have stated before, 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 we will begin offering training to other regional labs. We expect that during 2005 the momentum for widespread conversion of the UK program will accelerate.

We continue to be excited about the success we had 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. We made great progress toward that objective this quarter.

During the quarter, we shipped 28 systems, and as of the quarter, we had a total of 110 Imaging Systems generating revenue.

During the quarter, we continued to see additional reimbursement coverage for the ThinPrep Imaging System with plans representing an additional 384,000 covered lives, bringing the total covered lives to approximately 178 million.

During the last month, we announced new agreements with LabOne and with LabCorp. The LabOne agreement calls for LabOne to install ThinPrep Imaging Systems in their highest volume facility in Kansas City, which processes samples from all over the country. The LabCorp agreement, which runs through calendar year 2007, expands the scope and replaces our former agreement that was about to expire in December of this year. Our new agreement establishes pricing for the ThinPrep Pap Test, ThinPrep non-GYN supplies, and the ThinPrep Imaging System.

As many of you are aware, we have been involved with LabCorp in our valuation of the ThinPrep Imaging System since earlier this year. That evaluation was a success, and as we announced, LabCorp intends to roll out imaging throughout their system of laboratories over the next 18 months. Initial estimates are that LabCorp will require 80 to 100 Imaging Systems as we work together in this rollout. We estimate that annual imager revenues from this agreement could reach $20 to $25 million per year. We are very excited by this agreement with LabCorp and working diligently to ensure a successful implementation.

We had another record quarter with NovaSure sales of $19.7 million. During this quarter, approximately 90 percent of this revenue came from sales of single use disposable units. During the quarter, we sold nearly 21,000 disposable devices and 107 radiofrequency controller devices. We estimate that currently more than 4400 physicians in the United States have been trained to perform the NovaSure procedure and predict that by the end of the year 2004 more than 6000 physicians will be trained. We currently have a sales staff of Cytyc sales products specialists totaling 75 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 the Cytyc OB/GYN sales force, and that model is working very well. Additional sales resources behind CSP will accelerate market adoption of this exciting new device.

During the quarter, we continued our progress with each of our three growth initiatives and expect to see continued adoption of the ThinPrep Imaging System, growth in international markets and acceleration of NovaSure adoption throughout the remainder of '04 and 2005.

I will now turn the call over to John McDonough.

Thank you, Dan. The acquisition of Novacept was completed at the end of the first quarter, at which time we formed the Cytyc Surgical Products or CSP division, which is managing operations related to the NovaSure product including research and development, medical education, manufacturing and other support activities. A new RF controller was released to the market during September that lowers our cost per unit and provides an architecture for potential enhancements of the product in the future. Gross margins on the disposable device also continue to increase due to cost reduction efforts and higher manufacturing volumes.

The grand opening of our Costa Rican manufacturing operation took place on September 30. We were honored to have the President of Costa Rica at the grand opening, and we are very pleased with the world-class operation that has been developed. Morale across the CSP division remains high as measured by low employee turnover.

The third quarter represented the second full quarter of earnings for the CSP division. CSP contributed $19.7 billion of sales during the quarter, up over 9 percent from the second quarter. Revenue during the quarter included sales of approximately 21,000 single use devices and over 100 RF controllers, resulting in a total installed base of approximately 900 RF controllers at the end of Q3. Gross margins for CSP were 80 percent, an improvement of almost 4 percent over the second quarter, and significantly higher than our original target of 70 percent for 2004. Cost reduction efforts coupled with higher manufacturing volumes resulted in improved gross margins for the division as previously mentioned.

Domestic selling prices were consistent with Q2 at approximately $850 for the disposable device and $16,000 for the RF controller. We expect gross margins to be approximately 80 percent next quarter and in the range of 80 to 82 percent for 2005.

Since the acquisition in March, our 2004 revenue expectations for the CSP division have been increased twice. On our last conference call, we stated that we expected revenue from the CSP division to be in the range of $55 to $60 million for 2004. We believe that we will finish the year at the high end of that range. Consistent with our experience to date, 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 RF controllers. 2 to 3 percent of 2004 revenue is expected to come from international sales.

We expect the combined revenue of the CSP division and our diagnostics products division for 2004 to be in the range of $390 to $392 million and for earnings per share to be in the range of 79 to 81 cents, which is at the high end of the guidance given last quarter and represents roughly a 2 cent increase from the guidance provided to you at the end of 2003. These earnings per share expectations exclude the one-time charges related to the Novacept acquisition.

On March 22, 2004, the Company completed the sale of $250 million of contingent convertible bonds. The effect of approximately 8.4 million shares related to the assumed conversion of the bonds has been excluded from a computation of diluted earnings per share from Q1 through Q3 2004 because the market price trigger of $35.60 per share had not been met.

In September 2004, the Emerging Issues Tasks Force issued EITF issue 04-8, the effective contingently convertible debt on diluted earnings per share, requiring that the dilutive effect to contingent convertible debt instruments be included in dilutive earnings per share regardless of whether the market price trigger has been satisfied. This change in accounting principle is effective for all periods after December 15, 200, and will be applied on a retroactive basis. We expect the retroactive effect to have no impact on Q1 through Q3 2004 earnings per share. We expect a 1 cent negative impact in Q4 and for total year 2004 earnings per share and a 2 cent negative impact on 2005 earnings per share.

I will now discuss companywide financial guidance for 2005. We believe total Cytyc revenue will be in the range of $485 to $505 million. We expect our gross margin for the full year will continue to be in the range of 78 to 79 percent as we continue to build our service and manufacturing organization to support the imager while continuing to leverage our existing manufacturing infrastructure. We expect to release enhancements to our Imaging System that we implement with our existing customer base that could push margins to the lower end of this range during the first half of 2005, but we expect to be at the higher end of this range during the latter half of the year after these enhancements have been completed. We are targeting a total year operating profit in the range of 39 to 40 percent. We expect our 2005 effective tax rate will be approximately 37 percent. We believe 2005 fully diluted earnings per share will be in the range of 97 cents to $1.03 before the implementation of the EITF 04-8, which we anticipate will have a dilutive effect of approximately 2 cents. At present, we expect fully diluted earnings per share in Q1 of 2005 to be 22 cents to 23 cents before the impact of the EITF 04-8, which we anticipate will have a dilutive effect of up to 1 cent.

We expect to continue to deliver strong cash flow performance. Net of working capital requirements, capital expenditures and funds required to support imager placements, we expect to generate cash of approximately $80 to $90 million during 2005. As we have indicated in the past, our current cash and marketable securities balance of $179 million, plus incremental cash generated is likely to be used for strategic investments. We are highly enthusiastic about continuing our penetration of the ThinPrep Imaging System and laboratories that process in excess of 20,000 ThinPrep Pap Test per year. We believe the average incremental revenue per imager placed will be in the range of $225,000 to $250,000 per year, and that the unit placement opportunity over the next several years to be about 550 units in the United States. We expect to end 2004 with an installed base of approximately 150 imagers. In 2005 we plan to ship an estimated 120 to 130 additional units and believe incremental domestic revenue for imagers will range between $48 and $50 million. The contracts that have been signed through September 30, 2004 are expected to generate in the range of $20 to $25 million of revenue in 2005, representing 42 to 50 percent of the 2005 expected imager revenue.

We expect our domestic ThinPrep Pap Test business to stay relatively flat through 2005. As a result, we expect to ship between 36 and 37 million tests, representing between $250 and $255 million in revenue. Outside the United States, we expect revenue to grow at about 30 percent to $52 to $58 million in 2005. We expect the increase in revenue to be driven by the UK conversions of the ThinPrep Pap Tests and growth in other markets including China.

2005 will be our first full year of sales of our NovaSure product, and we expect it to contribute significantly to our growth objectives for 2005. We currently estimate that 2005 NovaSure revenue will be in the range of $115 to $120 million. We expect the sales of single unit disposables of approximately 120,000, to 130,000 units worldwide. In addition, we expect to place approximately 700 RF controllers worldwide during the year for an expected installed base by the end of 2005 of over 1700 units. We expect our gross margins from this product line to be in the 80 to 82 percent range as we continue to see cost reduction efforts due to higher manufacturing volumes and see the impact of various manufacturing efficiencies. We expect the balance of our revenues, which include T2 and T3 instruments, non-GYN disposables, the first FirstCyte Breast Test, service and accessories will be in the $20 to $22 million range in 2005 and the same range of revenue as in 2004.

Overall we feel that we are poised for significant growth during 2005. Approximately 25 percent revenue and earnings per share growth year-over-year. We are enthusiastic about continuing to penetrate the ThinPrep Pap Test market with Imaging Systems, ensuring that the NovaSure system is recognized as the standard of care in the endometrial ablation market, and we continued to be encouraged by the acceptance of the ThinPrep Pap Test outside of the United States. We believe these three growth platforms provide a solid foundation that will enable us to achieve our goal of becoming the leading women's health care company capable of achieving more than $1 billion in sales in 2008.

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

Thank you, John. Operator, we would like to now open the call up for questions.

(OPERATOR INSTRUCTIONS). Tom Gunderson.

Good morning. You guys win the award for most numbers per minute on a conference call. But seriously we appreciate the detail that you guys give on these calls.

I do need one quick clarification, and that is on the $200,000 to $225,000 per imager and these numbers that you are giving. I am assuming that that incremental is a gross number -- where I'm going is you get basically twice as much. Can you explain that a little bit as to what you mean when you are giving these numbers for the imagers?

Yes, that relates specifically to the upcharge portion of the imager usage fee. It does not include the ThinPrep Pap Test face fee if you will. It's incremental.

Thanks. And then I think this is probably for Leslie, but SG&A expenses were stable in Q1, up in Q2, back down a little bit in between in Q3. Can you give us a little guidance as to a) what is going on there, and b) where should we be looking for Q4 and maybe '05?

What you saw happen in Q2 was a result of the sales meeting that we had to integrate the two salesforces between Novacept and Cytyc. So that was a onetime event in the second quarter. Otherwise it has been pretty stable all year.

Okay. And then with regards to the sales force, could you just take a minute to breakout a little bit for us beginning of year, end year, and who is calling on who and selling what products?

Tom, the ThinPrep sales force, the group that has been calling on the OB/GYN specialty, that numbers 100 people, and that has been relatively constant throughout the year. At the time of the acquisition of Novacept, we acquired their sales force, which at that time numbered roughly 60 people, and those are the salespeople that spend the majority of their time in the operating room with the physician helping them perform the procedure, training on the procedure. That number has gone from 60 at the time of the acquisition to 75 right now, and we are are headed towards 100 early next year.

Thanks. I will get back in queue.

Wade King.

Thanks for the detail. Congratulations on the Red Sox. A couple of questions, please. I have two different numbers on revenue generating units at the end of the third quarter. I thought that Leslie said 88 and Dan said 110. Could you just clarify that for me? Maybe I misinterpreted one of the numbers.

Yes. The 88 is the equivalent units. Not all units come on generating revenue at the same time. So the 110 that Dan gave were revenue producing at that point in time at the end of the quarter. My number is a weighted kind of equivalent.

Okay. So your number -- Dan's number is total revenue generating units as of the end the quarter, whereas yours reflects a number of units that were basically up to some reasonable run-rate as of the end of the quarter; is that right?

That is right. If you take the 77 at the end of the Q2, which were revenue generating units, we added 33 revenue generating units during the quarter, and we assumed that only effectively 11 of them were -- effectively 11 ThinPrep Imaging Systems were equivalent revenue generating units during the quarter, and then we ended the quarter with the 110. So it's the 77 plus the 33 gets you to Dan's number of 110.

Okay, very good. Could one of you folks talk about utilization metrics for the imager in light of the guidance of revenue, your goal I believe that revenue generation per unit per year of 225 to 250? In the early going, we talked about 50,000 slide processing and imaging capability per imager unit, and we believe that has been going up. But what is it now, please? What are your objectives looking ahead?

Our revenue generating expectations are to be in that range of 225 to 250. Obviously there will be some units in the field that will be above that range, that average, and there will be some below that range (multiple speakers)

I'm sorry, Pat. Maybe I should clarify. I'm talking about the number of slide processing -- I'm sorry the number of slide image per machine, the capacity of the machine.

I'm sorry. Right now the capacity of the instrumentation of the Imaging Systems is about 75,000 capacity per year. We are making some manufacturing improvements that we will introduce about the middle of the first quarter, second quarter of next year that will take the imaging capacity up to about 100,000 slides per year. So the capacity instruments in the field will be going up next year.

Okay, very good. One clarification on there is a lot of data show thrown out on the international side I believe. It was stated that your expectations for '05 were 52 to 58 million international revenues. Yet -- I apologize there was a quick comment -- there was something about this represents 25 to 50 percent of total international. Could that be clarified, please?

Sure. The comments I think you're referring to was that the growth from '04 to '05 was expected to be 30 percent. So we did not speak about a total market size international and what that represents. We think it would represent obviously a much smaller portion of the overall international market opportunity.

Okay and once again it is correct that you said you expect a 52 to 58 million of international revenue in '05, and that includes both instruments sales and disposables. Is that right?

That is correct.

Lastly, the guidance on the bottom line, 97 cents to 103 in '05 before the impact of the convert shares that you reference, and I believe you said that that would have a 2 cent impact on '05. So 97 to 103 before that impact and then 95 to 101 including a 2 cent impact approximately from the additional convert shares.

That is correct. So with the convert shares built in, the range would be 95 cents to $1.01 said differently.

And it's about 8.5 million you said convert shares?

That is correct.

8.4.

I'm sorry?

8.4.

Okay. Thank you very much.

Glenn Reicin.

Again a lot of numbers thrown about. What did you say your expectations were for NovaSure in '05?

$115 to $120 million.

That's a worldwide number?

That's a worldwide number.

okay. And in the quarter, the 19 7, how much of that was international?

Roughly 2 to 3 percent.

2 to 3 percent international. Okay. Then you said there were 550 potential placements of imagers out there. What are you assuming in terms of slides per imager?

Yes, it obviously ranges, but the 550 number assumes roughly 60,000 to 70,000 slides per imager, and again that would be a U.S. market size number.

Sure. Okay. In terms of the total ThinPrep sales, did you break out the domestic versus international in that?

We did not.

Can you do that?

We have not done that in the past, the test breakout.

What about in terms of revenues?

Well, virtually all the revenue --

I'm talking about ThinPrep, I am sorry. The 67.5 million, the ThinPrep revenues, is that worldwide number?

That was domestic number.

What was the international number?

The international number in the quarter was 9. -- I'm sorry -- 9.9 million.

And no imager sales in that number?

That is correct.

Okay. And if I put all these numbers correct, most of your guidance for '05 is not terribly surprising. The only thing that seemed different was your backing off a little bit on your placement rates. Last quarter you said you wanted to end up the year with 160 to 170 total placements. It looks like we're good 20 units below that. Was there something strategic that has changed here? Demand characteristics? What has happened here?

I think the number you're referring to the 160 to 170 would have been from the start of the program, which it would have included 27 units from last year from '03.

We see this guidance as being totally consistent with what we talked about last quarter.

So that means what? Ending up the year with another -- in the fourth quarter with over 40 placements?

We're going to end the year with the total placements in 2004 of between 120 and 130 units -- and 150 -- if you add the 27 from last year, you're in the 147 to 157 range.

Which is lower than the 160 to 170 that you had offered earlier in the year?

I don't think it is different than what we said in the past. Again, I think the 160 to 170 number you're referring to would have included the 27 from last year.

That is correct.

Right. But I think I just heard you say you're going to get to about 145 to 150.

So 147 to 157. So it's 120 to 130 this year, plus the 27 last year, and we have not changed that.

We've been talking -- in fact, at the beginning of the year, we had expected 100 new units to be put into the field, and we brought that number up to about 125 at the end of the year. And then last quarter the guidance was increased to 125 to 130 new placements, which gets you right into the numbers that Dan just mentioned we are still expecting. So I am not sure where that 160 number is coming from.

Okay. I will reconnect with you off-line.

Bruce Cranna.

I imagine you're as tired as I am. Just a couple of quick follow-ups. Last quarter, Pat, you talked about percent across all your business, a percent of ThinPrep slides that have been imaged. And I think it was somewhere around 5 percent as I recall. I am just curious to the extent you can tell us on this quarter I am getting a number that looks like maybe 8 or 9 percent --

It was about 10 percent.

Okay. That is what I was thinking. And just specific to accounts that are imager accounts, what are you finding at this point? Well, let me ask you this. What percent of slides do you think are being imaged in those accounts that are imager accounts to the extent you can add a little color there?

Of the slides that are ThinPrep slides, virtually all of them are being imaged by accounts that have taken in an imager.

How quickly are folks getting to that 100 percent?

It is more quickly than we had anticipated. It is within the first 45 to 60 days we see them converting.

Okay. Thank you. And then just a little color on LabCorp, and I apologize if I missed your commentary. The 20 to 25 million run-rate there, does that contemplate any equipment sale at all, or is that just all consumable if you will?

All consumables.

So there is no sale component to that?

That is correct.

And then lastly on NovaSure, can you just add or give us a little color -- you talked about the number of I guess headcount in terms of salesforce. But if you look at the whole NovaSure number for the quarter and you look at the two components, and it may be hard to separate out the old Cytyc sales force from the Novacept sales force, but as a percent of sales who is really driving it here? Do you find that it is 70/30 Novacept folks, or what is your experience there in terms of who is accounting for the sales?

It's very difficult to determine who might be accountable for a sale. The reps in the physician office are generating increased leads, as well as increased utilization by existing trained physicians and the folks in the OR are training more physicians and working with trained physicians to do more procedures. So it's very difficult to distinguish who's responsible for the sale. In fact, we don't attempt to do that. We, in fact, incent both groups for increased sales in total.

Last question. John, you mentioned I think a new controller with respect to the Novacept business. Can you just give us a feel for what is happening there? I think you mentioned perhaps expanded capacity or new features. Can you put a little color on that, please?

Sure. It's really a redesigned box from a features and functions standpoint. It is virtually equivalent with the older RF controller. The new controller takes a much smaller footprint, so it's much more desirable in the doctor's office or in the surgical center. And very importantly the architecture has been reconfigured. So to the extent that we wanted to add additional capabilities to the box, the architecture would allow us to do that in the future. Again, we don't have any announcements or plans necessarily in that area, but we do have the capability to do that with a new controller.

Great. Thank you.

Ryan Rauch.

Congratulations on a good quarter. Just three or four quick things. First with, respect to guidance, can you give us exact sort of delineate the SG&A, R&D? It just appears EPS guidance was a little bit maybe weaker than I expected and First Call had. Can you just walk us through that?

And then two, did I hear your '05 imager placement is correct with respect to it being 120 to 130? If that is true, it seems a little light now that you have LabCorp. So can you just go over those two questions?

Sure. If you were to break down -- I assume what you're really asking is a bit of a break down on operating expenses because we broke it down to the gross margin level. But essentially if you were to look at 2004 to 2005, we would expect R&D expenses to be in the $33 to $35 million range for the company, total sales and marketing expenses to be in the 115 to 117 million range, and G&A expenses to be in the $43 to $45 million range. And if you use those numbers, you should get to operating margins in that 39 to 40 percent range.

In terms of the imager number, it is a bit lower. Basically it reflects a change in the character of the customers, frankly. The customers that were the early adopters of the Imaging System tended to be freestanding independent and commercial laboratories. The shift that is occurring is we are now penetrating more of the academic medical centers, and those by their very nature take a local bit longer to work their way through contracting with us. So we've taken a more conservative approach in forecasting for '05 placements.

I guess on the R&D that number seems a little bit at least much higher than what I was expecting. Can you walk us through some of the new initiatives that will be pushed forward from that spend?

Sure. I don't think it is significantly different than if you just look at the trajectory that we are on. So there is really no ramp up in expenses as compared to what we have been running at post the acquisition of Novacept. And really if you were to look at the overall R&D activities, there is a set of initiatives around the ThinPrep looking at enhancements to the instrumentation, enhancements to the imager.

We talked about as Pat mentioned earlier, for example, improving the capacity of the imager from being able to process 75,000 slides on an annual basis to 100,000 and perhaps even north of 100,000. And on the CSP side of the equation, we're looking at continuing to make enhancements to both the disposable and the RF controller. And we also have always some early stage research and development projects that we are not really ready to get into at this point in time.

And then finally just two quick things. I guess as evidenced by your Quest numbers and your competitors, there's clearly not share gains there by your competitor. Can you walk us through what you have seen, Dan or Pat, to date with your competitor having that new comarketing deal with Quest?

Yes. We see utilization and purchases obviously by Quest each month. We've not seen any change in their pattern of utilization or in their pattern of purchases, and that is really the only data points that we have.

Finally, can you just give us a little more insight with respect to the shelf? I mean there might not be much you can say, but anything you could add would be great and thanks a lot.

You're right. There is not a lot that we can say, other than we have put in place this registration statement that gets us flexibility in financing possible future acquisitions and similar strategic transactions.

Okay. Have a nice day.

Jayson Bedford.

Good morning. Just a couple of quick questions. To follow-on Ryan's comments, the 120 to 130 imagers, are you guys capacity constrained in any way, or is that a true reflection of the demand you're seeing out there?

That is not a reflection of capacity. We are finding it in terms of our manufacturing capacity. That is just a reflection of what we see as the demand in frankly the sales cycle in academic medical centers as we start to penetrate that portion of the market in '05.

Okay and how many of that 120 to 130, how many of those are going to LabCorp?

There are imagers in that number going to LabCorp. We are not at liberty to talk about any more details of the agreement frankly.

Okay. Just in terms of NovaSure, what do you think -- I know it's tough -- but what do you think your marketshare currently is, and then what is the kind of the three-year market growth rate of that market?

We believe that the market is growing at approximately 50,000 procedures per year. So beginning in '03 we think there were approximately 225,000 procedures. That will grow to just over 400,000 procedures in 2008. So based upon those assumptions and this is a best a guess and it is a guess, we think that during the quarter our marketshare was approximately 30 percent.

Okay. That is helpful. Then finally, maybe I missed this, but what is your tax rate expectation for '05?

37 percent.

Bruce Jackson.

Just one question. With the letters of acceptance, is that a U.S. number or a worldwide number?

That is worldwide.

David Lewis.

Just going back to the imager and I don't want to beat a dead horse here, but first of all, Pat or Dan, we had actually 130 to 140 incremental placements in '04, plus the 27 got you a guidance range of 157 to 167. You guys are still saying 150?

Everything will be between 150 and 160.

Okay. Fair enough. In terms of next year looking at our math here, we get $50 million of incremental imager revenue. Is that in the ballpark?

That is in the ballpark.

Great. In terms of imager revenue or excesses, I'm just trying to make sure how the metrics have shifted here. We're talking historically about 50,000 paps per imager processing, seven bucks a pop or 350,000. Does the 225 to 250 simply reflect the addition of LabCorp into the mix, or are we seeing something materially shifting from the pricing front on a go-forward basis?

I think it is our experience of what we're seeing both in terms of the volume at the laboratories and the associated pricing. Obviously lower volume accounts, as John mentioned, at the 20,000 range you are going to have a higher price per test, and the larger volume accounts in the 75,000 to 100,000 range would have a lower. But on average we think it's going to be somewhere between 225 and 250.

Okay. So the bigger driver, Pat, is that you are moving down into 20,000 or 25,000 processing facilities, which initially you thought were not going to cede a use for the imager?

That is correct.

Great. And secondarily, a lot of your customers we have spoken with believe that the imager currently can do about 100,000 paps per year. It sounds like you don't think that is true. So was there a change in terms of what you thought the theoretical processing power was going to be versus what it turned out to be?

No, they are optimistic. (technical difficulty)-- in our description of the product as approximately 70,000 to 75,000 per year.

Okay, so it is nice to have optimistic customers. In terms of just getting back to leverage here, maybe tied into some of John's comments, it sounds like the Novacept device is actually at the 82 percent gross margin rate a lot faster than we thought. It sounds like the cost per unit has fallen to the 150 to 175 range.

Imager obviously has very nice profitability, and your revenue guidance was right in line next year. Is the material difference only this increase in research and development, or has there been any kind of change in your EBIT contribution for the imager that is different now than it was six months ago?

I don't believe so. I think the R&D number is consistent with past patterns.

It is, Pat, but if you look at just on -- you're running kind of 5.5 million per quarter, so this would imply an increase sequentially of about $2.5 to $3 million, which is fine, and obviously you have to invest going forward. When do you think that inflection point is actually going to occur on an absolute basis?

Part of that may be the addition of the Novacept R&D into the base numbers that you might be concurring. I guess we would be happy to take you off-line.

Okay, we will do that. Sorry. And then just one could question for Leslie, then one other one for John. On inventories as you move over manufacturing facilities, should we anticipate a buildup of inventories to compensate for that move?

There will be a slight buildup in inventory but not significant.

Okay. And then, John, just talk about the dynamics heading into next year. The Novacept number was obviously very strong, or NovaSure number was very strong. Do you still think in '05 principal share gains are going to come from the conversion of the hysterectomy market for overall ablation and maybe J&J competitive share gains? Maybe talk to us about how the dynamics shift heading into '05?

Well, David, I think today the majority of the growth we're seeing in NovaSure comes from competitive conversion, and I think we will continue to see that. The Change A (ph) product continues to have the lion's share of the market, so I think we will continue to see that in '05.

But in addition to that, it will be additional ablation procedures that will be performed on women who are not treated at all today, and then in women who are being treated with hormone therapy and then finally from the hysterectomy segment. So all three of those I think are sources of growth in '05.

You had a very big DPC marketing campaign with ThinPrep in the later stages of adoption. When do you think it is appropriate to go out there and spend that DPC money to try to convince women that, hey, there's a six minute procedure that can get you off some of your drug therapy? When do you think we will start -- when do we think we will start seeing some of that move by you guys?

We're doing the work to evaluate that and doing the market research to support that decision as we speak.

Great. Thank you very much.

Ed Jenkins (ph).

Two financial questions. One, on the gross margin improvement in the quarter and comments on moving the ThinPrep disposable down to Costa Rica. Do you have plans to do that? When would it happen? How much impact could we expect?

And the second financial question is on the tax rate. You gave guidance that it will go down in '05. I'm wondering is any of that due to tax laws changes that you're anticipating, or is it purely due to moving to Costa Rica some of the manufacturing?

First, on your gross margin question, the improvement was basically on the NovaSure productline, the increased revenue and better gross margins there which contributed to the upside.

And on your tax rate question, the 37 percent that we are projecting, approximately 37 percent next year, is all a reduction of the tax planning initiatives that we put into place in mid-2003 that we are just beginning to see benefits from.

And with respect to the ThinPrep disposable, we don't have any plans to move that to Costa Rica, primarily because it's very much of an automated manufacturing process. And what we look to leverage in Costa Rica is when there is heavy labor components associated with the product, that will be a logical place for us to look to Costa Rica. But in all likelihood, the ThinPrep disposable is probably not one of those opportunities.

Congratulations on the LabCorp contract. Could you give any comments as for as Quest goes what you're expecting for timeline in getting an imager contract there? Is there anything you think comment as far as negotiations? I guess you're probably getting into them now with the May contract expiration. Anything you can tell us?

Nothing new to report. We have conversations with Quest on a regular basis about a variety of topics, but nothing new to report.

No further questions. Thanks.

Operator, we will take one more question please.

Tom Gunderson.

Just two quick follow-ups. Number one on the NovaSure, I realize there were smaller sales components last year, but do you have any same-store sales, Dan, that you could compare and show us what the customers who had them last year are doing this year?

And then second, just a quick comment. We spend a lot of time on early adopters. I'm curious if you can give us any color on the 18 new ThinPrep customers that decided in 2004 this was the right thing for them?

In terms of same-store sales, we do not track that frankly. We could tell by account, but we are not able to comment on that at this point in time.

In terms of the 18 or the new instruments and customers in the United States, there are a variety of customers. They tend to be on the smaller volume side frankly. So in the less than 25 tests per year variety of customer.

I would now like to turn the floor back over to Anne Rivers for closing remarks.

Thank you, operator. This is Pat Sullivan. I'm very pleased with our strong financial performance for the third quarter and first nine months of 2004. As we discussed during today's call, our organization demonstrated excellent execution of our key growth initiatives in both the diagnostics and surgical divisions of our business.

Last week we announced the appointment of Tim Adams as our Vice President and Chief Financial Officer effective November 8. Tim brings to Cytyc more than 20 years of strong financial leadership with worldwide experience in finance, and he will be a key player as we continue to execute our growth strategy.

We would like to thank Leslie for her valuable contribution in acting as Chief Financial Officer and look forward to her continued involvement in the strengthening of our financial capabilities. Thank you for your participation in today's call.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and have a wonderful day.