Hologic Inc (HOLX) 2007 Q3 法說會逐字稿

Welcome to the Hologic, Inc. third quarter fiscal year 2007 earnings results conference call. Today's conference is being recorded. Before we begin, management of Hologic, Inc. has asked that the following statement be read.

Certain statements made by management of Hologic, Inc. during the course of this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause actual results, performance or achievements of Hologic to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, those detailed from time to time in the Company's filings with the Securities and Exchange Commission. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions or circumstances on which any such statement is based.

At this time for opening remarks and introductions, I'd like to turn the conference over to Chairman and CEO Mr. Jack Cumming.

Thank you. Good morning, everyone. Thank you for attending our third quarter fiscal 2007 conference call. Joining me on the call this morning is Dr. Jay Stein, our Co-Founder and, of course, our Chief Technology Officer, Rob Cascella, our President and COO, and, of course, Glenn Muir, our Executive VP and Chief Financial Officer.

Before proceeding, I remind you the Safe Harbor statement accompanying our press release applies to comments made during the call. We're pleased, of course, to share with you our fiscal third-quarter financial results for the period ending June 30th, 2007. And I'll briefly touch upon the highlights, while Glenn will provide further details on our operational progress, as well as guidance for the remainder of fiscal 2007. We will then open up the call for questions for Rob, Glenn, Jay and myself to answer.

First, let me start by congratulating our colleagues at Cytyc for an outstanding quarter and continued gains in their core markets. Everyone at Hologic is excited by the prospect of combining the talents and resources of both companies, and the great passion its associates bring to their roles, which has resulted in wonderful success for each of us. This passion has clearly been a key differentiator for Hologic and Cytyc, and our expectations are we'll only get stronger with a combined portfolio of market-leading products. Glenn and I are going to try to do our best to match Pat and Tim's (inaudible) presentation of the quarterly results, albeit a daunting task, but we'll do our best.

Prior to going into the actual third quarter numbers, I want to bring everybody up to date on the acquisition of Cytyc. As you know, we announced this in our third quarter. It will position Hologic as one of the largest dedicated women's healthcare companies in the world. Cytyc is a developer of integrated solutions in screening, diagnostics and therapeutics for cervical cancer, breast cancer, (inaudible), prenatal health, endometriosis, and permanent contraception. And our combined product portfolio will encompass some of the largest and trusted healthcare brands in the industry. We will have direct sales operations in 20 countries with more than 3700 employees worldwide. Our 1200 sales and service associates will increase our presence in hospitals, clinics, private practices, and will target OB/GYNs, breast surgeons, radiologists and oncologists.

Recently there has been a tightening in the credit markets. This will have no impact on the financing for this deal, or our ability to complete the deal, as we have in place a firm, fully committed finance line from Goldman Sachs. At close, we will either fully draw on our line with Goldman, or, as expected, we can draw down approximately one half of needs from a prepayable term loan we intend to market in September. As it now stands, interest rates have moved up a bit since we announced the deal, and incremental interest costs may be a bit higher than our original guidance in the first couple years. The prepayable term loan financing portion is expected to be paid in full within three years, so the overall interest cost is minimal and doesn't change the accretive nature of the deal. But to repeat, there is -- with all this tightening going on, there is no impact on the financing of the deal or our ability to close the deal, as we do have a firm, fully committed financing line from Goldman Sachs.

We have recently also received SEC comments on our Form S-4 registration statement, and the SEC performed a limited review, and their comments were focused on the transaction. There were no surprises. We will update our S-4 to include both Hologic and Cytyc June 30th numbers, and will file an amended S-4 in August. And we continue to be on track for a shareholder vote and closing in late September or early October.

Now on to the quarterly performance. I am pleased to say that this marked our 14th consecutive quarter of increased revenue and earnings. Hologic team members did an outstanding job in the third quarter, and as a result of their efforts, we were able to deliver record revenues, earnings and backlog. Let me take a few minutes to summarize some of the financial results.

As stated in our press release, third quarter fiscal 2007 revenues totaled 191.5 million, which represents a 60% increase over the third quarter of fiscal 2006. The third quarter fiscal 2007 net income totaled 24.7 million, a 106% increase over the 12 million we reported for the third quarter of fiscal '06. On a non-GAAP adjusted net income basis for the third quarter, our income was increased to $28.7 million, which was 104% over the same period last year. And for the nine months, revenues increased 74% to $535.8 million. For the nine months ended June 30, '07, Hologic recognized net income of 62.4 million, or $1.14 per diluted share. That's up 115% compared with net income of 28.9, or $0.61 per diluted share, for the comparable nine-month period.

Some of the highlights for the quarter are as follows. The Mammography/Breast Care revenues increased 78% to 153 million for the third quarter of fiscal '07, compared to 85.8 for the same period. Selenia full-field digital mammography system sales continue to set quarterly records. As you remember from our last quarterly conference call, we forecasted 300 Selenia for the fiscal third quarter. And once again, we surpassed our target by recognizing 328 Selenia systems as revenue in Q3. And that's up 113% from the 154 systems we recognized as revenue for Q3 2006. Our Selenia bookings were solid [and] pushed our backlog to 537 systems, as average customer purchases continue to reflect larger multi-system orders, which will be installed over six to nine-month [paces]. And also contributing to quarterly growth was an increase in orders for Hologic's computer-aided detection system for digital mammography and our Suros line of breast biopsy systems and devices. Total backlog for all products at quarter's end was 222.1 million, and represents a 34% increase over the 165 million backlog ending Q3 2006.

In summary, our performance remains strong, and we're confident we will far exceed our original fiscal year-end goals we set last year for 2007. In fact, we have continued to surpass our increased guidance, which holds great promise for the future.

And with that, for more detail on the Company's operations and finances, let me turn the call over to Glenn Muir.

Thanks, Jack. I will now expand on the financial results of the quarter. My comments are also summarized in a PowerPoint that can be accessed on the IR page of our corporate Web site at Hologic.com.

It was another stellar quarter for Selenia, which accounted for one half, or 96.1 million, of our total sales of 191.5 million. Total revenues increased 71.8 million year-over-year, and Selenia accounted for 43.2 million, or 60% of this increase.

The balance of this quarter's growth was primarily from our three acquisitions last summer -- Suros, R2, and AEG -- which in total accounted for 28.4 million of the increase in revenue. Another bright spot was our service revenues, which totaled 28.5 million, up 10.9 million, or 62% year-over-year, and continues to grow in line with our increasing installed base.

Regarding the Selenias, the 328 systems sold this quarter was above our plans at the beginning of the quarter -- we had targeted 300 -- as demand continued to outpace our expectations. 258, or 79%, of these were sold in the United States, and 70 were sold overseas. In addition, 235 of these Selenias were shipped with digital CAD. And in the U.S., 88% of the Selenias were sold with CAD. As Jack stated, at quarter-end our backlog of Selenias had increased to 537, up from 533 at the end of March.

Our gross margins improved this quarter as well, hitting 47.1%, or 48.4% on a non-GAAP adjusted basis, due in large part to the overall increased sales volume and the continuing shift in mix to the higher-margin Selenia digital mammography sales.

Our consolidated net income this quarter was 24.7 million. This increase in income handily beat our expectations, as the higher level of revenues contributed 40.5 million of additional gross profit over Q3 of last year. Partially offsetting this was an increase in operating expenses, also primarily due to the increased volume. Without the acquisition-related charges and the stock compensation expenses, the non-GAAP net income would have been 28.7 million. A reconciliation of GAAP to non-GAAP net income is included in our press release and is posted on our Hologic.com Web site. This works out to an adjusted EPS of $0.52.

If we now look at our largest reporting segment, the Mammography/Breast Care segment, compared on a sequential basis to our March quarter, the second quarter of this fiscal year, the press release gives a comparison to the year-earlier quarter. This quarter, the revenues from our Mammography/Breast Care segment accounted for 80% of our total, up 6% from the March quarter. The increase in revenues of 8.6 million from March was primarily due to the increase in the number of Selenias sold, from 282 to 328 Selenias, and an increase in Suros console sales and handpiece volume. The Suros increase this quarter was $1.4 million. The increase in operating income was due to the increased gross profit from the higher revenues, and the operating income as a percent of revenues continued to increase, hitting 24.7%, up from 22.8% last quarter.

Ending backlog at 222.1 million was considerably higher than the 165 million balance from a year ago, and slightly higher than the March ending balance of 216 million. The backlog of Selenias rose to a new high of 537 systems, up 4 from the March quarter and up 195 from one year ago. Even though we shipped 28 more Selenias than expected, our unit backlog increased again this quarter as we took orders for 332 Selenias.

This was a much better booking quarter than expected, and two factors stood out. Number one, the continued interest in digital mammography in general. The digital market is continuing to expand, especially in the United States. And number two, Selenia is recognized as the best-of-breed digital product, which is allowing us to achieve a 55% plus share of the U.S. market. In Q4, we will again increase the shipment of Selenias, with the goal of stemming the rise and ending backlog by the end of 2007.

If we turn to our balance sheet, last quarter we were able to repay the balance of our revolving credit facility that was set up last summer and initially drawn on for $65 million to fund last year's acquisitions. This quarter we were able to increase our cash balance to almost $94 million through focused working capital management. We were left with a sound balance sheet as our financial results steadily improved.

In summary, the acceleration of Selenia sales continues to drive our earnings growth. We are very pleased with the three acquisitions made last year and their contributions to our revenue and earnings. Both R2 and Suros are fully integrated into our operations, and we are capturing the sales synergies we were expecting. The R&D and manufacturing benefits of AEG's in-house selenium coating expertise is just beginning to be recognized. We should continue to see ongoing improvement from AEG.

If we turn to guidance for fiscal 2007, starting with Q4. First, if we review our previous guidance for the past quarter Q3, in June we were expecting consolidated revenues of 188 million. We had expected consolidated gross margins of about 47%, and we had expected GAAP pre-tax of approximately $37 million and EPS of $0.42. Our actual results were a bit better than guidance, primarily due to the higher revenues, the increased number of Selenias sold, which because of the leverage in our business had a sizable positive impact on the bottom-line.

For the fourth quarter of fiscal '07, which ends in September, we expect a continued increase in total revenues and an improvement in gross margin, both sequentially and compared to the prior year. We see the real growth continuing to be generated from our Mammography/Breast Care segment, primarily from the demand for Selenias, and also the more rapid adoption of Suros biopsy devices.

In summary, we see a sequential increase in Selenia sales as we target 340 Selenias for the quarter, which is 12 more than this past quarter, and would result in an approximate $4 million increase in revenues. And we also expect a $1 million increase in revenues from Suros. This would put consolidated revenues at approximately 197 million. Consolidated gross margins are expected to increase slightly to just about 47%.

Compared with Q3, this past June quarter, we are expecting operating expenses to increase between 1 and $2 million, reflecting higher R&D, sales and marketing and G&A expenses, as we continue to invest in the growing business and reflecting the increased sales volume. Operating expenses as a percent of revenue were expected to decline to 27% for the June quarter, and came in just under 27% due to the higher revenues. For the September quarter, we are expecting the operating expenses as a percent of revenues to continue just under 27%.

GAAP pre-tax will then increase to approximately 42 million. This includes stock compensation charges and the amortization of intangibles of approximately $5.3 million. On a GAAP basis, this quarter, Q4's EPS, based on 42 million pre-tax and a 38% effective tax rate on 55 million shares, would be approximately $0.47. Excluding the FAS 123 stock option charge and the amortization of intangibles would add another $0.06 after-tax. That's Q4.

If we now update this guidance for our fiscal year, which ends on September 29th, we now see consolidated revenues increasing from the $725 million we were expecting last quarter to over $730 million, led by an increase in the number of Selenias sold and the three acquisitions from last summer.

There are three main components of this year's growth.

First, in the Mammography/Breast Care segment, we have the increase in Selenia. We sold 555 in FY '06, and we are increasing our FY '07 target from 1100 to 1178. This reflects the 340 Selenias we're guiding for Q4. This increase year-over-year of 623 systems represents 180 to 190 million of incremental revenues over FY '06.

Number two, we also have the two acquisitions in the Mammography segment. We have previously indicated our revenue growth for R2 and Suros for FY '07 was 80 to $90 million, which we remain comfortable with. Combined, these two acquisitions added $15 million in the last two months of last year, so the expected increase this year is 65 to $75 million. The Mammography/Breast Care segment would then account for 245 to 265 million of this year's incremental revenue.

The final piece is the combined Osteoporosis Assessment and Other segment. This segment we expect to remain flat, with the one exception being the AEG acquisition, which more than doubled from 18 million last year to 40 million this year, an increase of $20 million, primarily due to its inclusion in our operations for the full year.

Our initial target for our gross margins this year was in the range of 45 to 46%, which was up from last year's 42%, due to our higher revenue and shift to Selenia. With the increased guidance of an additional 325 Selenias, we are expecting gross margins of around 47% this fiscal year.

We are expecting all operating expenses to increase year-over-year, reflecting the significant growth in sales. Total operating expenses are expected to be close to 200 million, or approximately 27 to 28% of sales.

Included in FY '07 operating expenses are a number of non-cash charges. These are, number one, the amortization of intangible assets of 17 million, and the stock compensation expense of 6 million. These charges total 23 million for FY '07.

For FY '07 we're expecting an effective tax rate of 38%, and the number of shares outstanding are expected to be just over 55 million. Based on the above, for FY '07 we are expecting pre-tax income of approximately 142 million, which would result in GAAP EPS of approximately $1.60. This does include the non-cash charge of $23 million. If excluding the amortization of the intangibles and the stock-based compensation, it would add approximately $0.26 to the EPS number.

With that, let me return back to Jack before Q&A. Jack?

Thank you, Glenn. Great summary. Just briefly, I'd like to, before I close, highlight one of the good events that happened for us in this past quarter, and that was the fact that we entered in a definitive agreement to acquire BioLucent, a privately-held medical device company located in California.

BioLucent manufactures and markets the proprietary MammoPad breast cushion, a radiolucent foam pad that covers the cold, hard surfaces of all commercially available mammography equipment. BioLucent's patented MammoPad is designed to reduce the discomfort that inhibits many women from getting regular mammography screenings. MammoPad is offered as the standard of care in nearly 20% of mammography facilities in the U.S., and has been used by more than 10 million women. This transaction is expected to close in September, and it naturally fits with our current channel, and we're very excited about having the folks at BioLucent join the Hologic family.

Finally, looking back again on the Cytyc acquisition, Cytyc has focused on gynecological health, while Hologic has focused on breast health. We do different things, but we do it for the same purpose. And maybe together we can do more -- more life, more health, for more women. And our hope is together, we can make life a little better for women everywhere.

And with that, I now would like to turn the call back to Angelina so she can ask for questions.

(OPERATOR INSTRUCTIONS). Eric Lo, Banc of America Securities.

I was wondering if you could give us an update on the competitive dynamics in the marketplace coming from GE and Fuji.

I think that Rob would probably be the best to handle that (technical difficulty) add any color. Rob?

I think it's really -- it's been somewhat similar to earlier quarters. I believe that GE remains to be a rational competitor. I don't see much more activity domestically from them. We do see that they're being pressed, surprisingly, on an international basis, and are responding with more aggressive pricing. With respect to Fuji, we see them on the periphery of the market. Again, I think their place has been a certain segmentation that is -- remains the lower end of the market, low volume users, those that are not ready to convert yet to a direct radiography approach to digital. Again, our success in our order rate this past quarter is a strong indication that although there are competitors that are certainly not going away, we command a compelling share of the market at this point in time.

Do you have a good sense of how many installations Fuji has been able to install, or what their market share is currently?

I don't, other than that, I think, they announced that they took orders for their 100th system at some point, I think, recently over the last few months. I would imagine that they're below 10%, somewhere in there, probably 5 to 7% relative to the market in the U.S. at this point.

What percentage of your new orders are currently coming from competitive accounts, would you say?

I think we're seeing, because of the aging of originally installed older GEs, a higher percentage. Normally we're running at 10 to 15%; I would say we're in the 15 to 20% range today.

It looks like your OUS installations had a nice healthy increase sequentially. Do you think the 70 units you guys installed this current quarter is a sustainable rate?

I think we -- we're very excited about international, and I think the complexion of our international business has changed as well. What I mean by that is that normally we were selling single units to individual customers. We're now finding multi-unit transactions out of international customers. And some of the opportunities that we've discussed previously, relative to more in-country activities, are now coming to fruition as well. So we're seeing a very strong international market, and we're also seeing that we are gaining share against the incumbent, which, again, is GE and some of their older placements.

Last question is regarding Tomosynthesis. I know you guys completed your trials recently. Have you guys filed your PMA yet?

We discussed earlier that relative to any additional interim information, we would defer on disclosing that, and that when in fact we receive FDA approval, we'll announce that to the market.

Amit Bhalla, Citigroup.

On the international front, can you give us a sense of the ASP differential? It looks like your gross margin within that segment and operating income in Mammography were still pretty strong, given the high international sales. So, maybe a little bit of an explanation there would be helpful. Thanks.

Where, I think, you see it predominantly is in gross margin, because we sell that at a dealer transfer price basis, so that even though -- and customer pricing would be lower, depending on the international market. The gross margin side of it is significantly lower than when we sell direct. The good news is that we also don't have the direct sales and service load that we have to carry on a domestic sale. So from an operating margin perspective, there is almost parity relative to the contribution an international sale makes versus a domestic sale, because of the reality of not having to support a direct sales and service operation abroad.

Is 70 units the run rate we should be looking for going forward?

I think we're looking for positive growth. And when Glenn gave guidance in terms of where we think the balance of this year comes out, I think, there is a pro rata appreciation internationally as well.

Just a follow-up also. Could you maybe elaborate a little bit more on the SEC questions, and where you are in the process of responding?

I can help out on that one a little bit, Amit. We just received the comment letter about a week ago from the SEC. And just to remind everyone, we filed the registration statement on form S-4 the very end of June. So that was a fairly quick response by the SEC, I guess; a little bit more than three weeks. But it was a limited review. They focused solely on this particular transaction. And there is -- there was no questions that are any at all troubling at all, they just have to be simply answered, and the comments delivered to the SEC, and our S-4 updated to include our June 30th number. So we will have to take a little bit of time here to update the financial information and the pro formas that are included just to reflect the most recent quarter. And for us, we'll be filing our Q for this quarter on August 9th. So the amendment to the S-4 would follow that Q filing. So we're probably a couple weeks away from fully responding to the SEC. But we don't anticipate any issue at all, and it still keeps us on track as far as a shareholder vote and a closing either the very end of September or early October timeframe.

Thanks, Glenn. One other quick follow-up. Can you give us the Mammography backlog dollar number? And I think I may have missed what the Suros and R2 revenues were in the quarter. Thanks very much.

The R2 revenues -- and this is revenue not included on the Selenia itself, so it gets a little bit difficult at this point because we bundle most of our digital CAD today with Selenia. But the R2 revenues still came in at 7.5 million. The Suros revenue was 15.7 million. And as I said, we're looking for that to increase another $1 million or so in the Q4 quarter. As far as the backlog for Selenia, as part of the 221, it is the -- it's in fact the majority of that backlog number. I don't have the exact number, but it's the majority of it at this point.

Dean Asofsky, Credit Suisse.

When you guys announced the Hologic deal, Mr. Cumming made a point of saying that he kept his cellphone on 24 hours, and that he hadn't received any calls, or didn't think that he had, relating to Hologic itself. I assume you've kept your cellphone on? Same comment?

My cellphone remains on and I'm on the ready. But there have been no calls. (multiple speakers)

Tycho Peterson, JPMorgan.

Glenn, following up on your comment a minute ago about the Suros ramp, can you give us a sense of what's doing particularly well here? Is it the new ATEC needles? And how much bundling is going on with MultiCare tables at this point?

Sure, absolutely. Just to put it in the right perspective, last year on a fiscal year basis, the Suros revenues were just a bit over $30 million. So we're on target to hit just about the $60 million we were expecting for fiscal '07. So it's a nice jump year-over-year. And I think a lot of things went right. I don't think it was all Hologic. Suros has the premier product in the marketplace, and they're just getting additional traction in the field, especially as it relates to disposables being used on the ATEC consoles that have been out there for a year or two at this point. But at the end of the day, I think, we are helping. And we help from the standpoint that our salespeople are directly into those radiology accounts, and that we are selling the MultiCare unit, which you can imagine on every MultiCare unit we sell, we try our hardest, and we're very successful in bundling that with a Suros console. And we get those follow-on (inaudible) pieces from there.

I don't have an exact number on the volume on the MultiCare, because that's relatively new. It's really the future driver of that disposable business by placing those MultiCares today. But we've sold 70 MultiCares in the quarter, so that's a big number that we sell every single quarter that we can begin to bundle those Suros's to.

The second thing important thing that happened at Suros was the new Celero product that they recently introduced. And there was about $1 million worth of sales of that product as well, but that's just simply the first quarter. And that has a huge opportunity as we go forward, as we've talked about before, with the whole Cytyc combination and their sales force helping us, especially in the market of breast surgery, to sell that handheld device.

I guess that's kind of a good segue into my next question, which is thinking about Selenia a little bit, and you've talked about de-coupling the camera from the process station, and I know you've done that in some cases. That seems to be one of the interesting opportunities, obviously, with Cytyc to push the de-coupled channel, maybe through the OB/GYN channels. Can you give us a sense of how often you're doing that now?

Tycho, when you say that, you're suggesting -- the question is one of the modality being detached from the workstation?

Exactly.

We've been experimenting with that around the country, and in fact have had some, I think, very good success, interesting success; not one that we have rolled out across the country yet, but there are certain pockets geographically where that model of hub-and-spoke gynecology office with a screening unit, central reading facility with workstations and diagnostic units, is one that over the next year, we think, we can certainly leverage. And clearly, having the presence that Cytyc has is a great way for us to have market access where otherwise we would have not.

Okay. And then finally, Glenn, can we get an update on the manufacturing production, where you stand from the vatting capacity?

I'm not certain if there's a more specific comment, other than that our build rate today has increased substantially. And we still remain on one shift in our Danbury operation, and a shift and a half in our Newark operation. The only factory that is running with partial shifts around the clock is our AEG factory, and that is selenium and organic coatings. So we still believe that we have some bandwidth relative to the current brick-and-mortar that we have, and it becomes a matter of either adding an additional shift or adding additional employees to the current or primary shift. We continue we do so as, we believe, tactically we need to.

Congratulations on the quarter.

(OPERATOR INSTRUCTIONS). Mark Richter, Jefferies & Company.

Great quarter. A lot has been made about potential synergies with yourself and Cytyc. Can you comment or talk to us about your pro forma sort of international growth strategy, and then maybe any R&D initiatives that you guys are internally developing that will go after the OB/GYN channel?

I think it's a bit premature for that, because we're really just in the budgeting process now. And that really kind of will vet itself out over the course of the next 30 to 45 days. We have the budget that has to be presented to the Board of Directors come second week in September, so we've got a lot of work between now and then. Conversations have certainly gone on, and they will continue to go on at an accelerated rate over that period of time. But I just came back from an extended trip internationally, where Cytyc was certainly one of the focuses of the discussions. And we see some great opportunities there for actually using the direct channel that Cytyc has to help support our current distribution channel, to give us leverage down the road for options that we haven't had today. And we see some very large distributors that we have that we think they can help the Cytyc products on a more immediate basis.

So it's going to help on both sides. And relative to the R&D, that is, obviously, an ongoing process. We're highly focused on our Tomosynthesis right now, as they are with bringing the [adionic] to the market, having the Gestiva finished up. So I would say that more on the biopsy side and on the radiation oncology side is where you're going to see some of the initial efforts. But those are out years.

Perfect, thanks. Just on Tomo, I know you won't comment on updated timelines, but can you just help us or give us a sense of -- I spoke to Glenn and others about this in the past -- but just your pricing, or potential pricing strategy. It seems like it's going to be potentially a forklift upgrade, and then sort of what you're thinking maybe from a 30,000-foot level about pricing.

I think Rob could answer that. Because, one, we're not allowed to give a definitive answer on pricing because of the FDA. We can talk about a not-to-exceed type of price. Rob, why don't you do that since Mark has been unable to get Glenn and I to commit?

Sure. I don't think we're in a position yet to commit to the specifics of pricing. But I can say that fundamentally, the trade-up program is part of our strategy. So we will make it and provide an incentive to our customers to trade in their used Selenia to trade up to this new platform, and make the economics work to their benefit and ours. Because what we believe is that there is tremendous downstream revenue opportunity from we being able to have access to used systems, which thus far we have not. So the twofold benefit is one of up-selling a higher-margin product that has advanced features and functionality, namely Tomo, and the secondary opportunity of being able to sell in the lower end of the market both domestic, and in parts of our international markets, where either CR has a greater presence, or they are on the fence relative to analog, where we will now have an economic model that will make sense to them as well.

But is it fair to say, without committing on pricing, 6 to 700,000 wouldn't be out of the question?

It's difficult for us to do that. I apologize; I don't want to fundamentally give out pricing, given FDA and other issues that we have. So if you can bear with us, we'll reach a time where we can be very, very specific with that.

Perfect, thanks. My last question is just there's been a lot of speculation about potential other acquirers for your business. Obviously, as time goes on, that becomes less and less likely. Can you maybe comment on your views of that?

I think that you eloquently said it. I don't know if there's much to add to that, Mark, unless Roche wants to come and pay $150 a share for ourselves or Cytyc. They seem to [be on a streak] doing that nowadays.

Perfect. So you'd take 115?

I would have to ask Pat about that first, as a gentleman. We want the companies to come together, so I leave those things up to the Board. We do not see it happening. We never anticipated it would happen. We both did this for only one reason -- to put two great companies together, and not to encourage others to come forth. And that's what we've said, and that's what we're going to continue to say.

Dalton Chandler, Needham & Company.

Just a quick follow-up on the great strategy. I think at some point you do plan to ship a Selenia, a version of the Selenia that is field upgradable. Can you just remind us when you expect to do that?

When the new platform product comes out, it will be both a premium 2-D and upgradable through software to a 3-D system, so that it will leave the factory as a Tomo-ready project. That will happen with the release of the product. There will be a 2-D version of it that will be available concurrent with the FDA approval of the 3-D configuration of it.

So it's dependent on FDA approval for Tomo, even though it would be shipped without the Tomo capability activated?

We've made a decision that we will have a platform FDA approval which is both 2-D and 3-D. We could have taken a different route, and sought to get FDA approval of simply a new 2-D platform. From a timing perspective and a filing perspective, at least at this moment in time, it seems that it made better sense for us to take the route of having the platform approved, which has multiple capabilities.

And then just a housekeeping thing. Could you give us the revenue breakout for digital versus film?

The Selenia, including the -- including the R2, (inaudible) including CAD, was 96.1 million. The analog business, as you might imagine, has dropped down (inaudible). It was a bit under $6 million. So it wasn't --

That was about the same as last quarter, I think, right?

It was.

And then just a final question to circle back to the original competitive question. You mentioned you see Fuji at the low end in the low-volume units. Could you give us a sense of what percentage of the installed base, both domestic and international, would fall into that low-volume category?

It's really hard to tell, and not to be evasive about it at all. And the reason being is that if you think over time, if there are really 9000 sites that are practicing mammography, those that are really ultra-low-volume will probably end up being consolidated. And the numbers of equipment won't change, and perhaps will even go up. But the number of sites practicing mammography will go down and consolidate with larger sites, which will then foster the need to have DR because of the workflow efficiencies that are gained through that technology. So I think there may be a brief bridging period. But from a longer-term perspective, we see more consolidation happening. You heard us talk earlier about the hub/spoke model. That is an acceleration of what will drive consolidation. Because again, the cost of a modality without all the workstation and the price of having a radiologist on staff is far more economical for some of these smaller areas. And that's probably where the market is going. But in order to do that, you really do need a DR system. Because if not, you're going to be back to zero workflow, if not negative workflow, with another alternative.

Jayson Bedford, Raymond James.

I just have a few questions. First, I'm just trying to reconcile the pricing. I know this is simplistic, but 96.1 million in Selenia revenue, by the 328 units you shipped, it implies that pricing is coming down sequentially. I'm just wondering if there were any -- if that's just a reflection of the product mix in terms of more OUS. Were there any big orders at discounts? That's my first question. Secondarily, it looks like you're guiding towards 12 more incremental Selenia units from 3Q to fourth quarter, which would add 4 million, which implies a pretty sharp step up in ASP in the fourth quarter. Wondering if you would just give us a little more light on what's happening on the pricing side.

Rob, why don't you do that, since Jason already answered the first question because he had the answers. (multiple speakers)

Actually, Jason, I think you did a very good job at that. I think if I said yes, yes and yes -- again, I think you have to really look at both market and product mix, as you've indicated. And if we have very large customers, there's two things that go on. Obviously, there's pricing that's based on volume, but also the configuration of the product is different, meaning there is not one workstation for every modality, as we have explained in the past. That's another $75,000 that comes off of the per-unit price, because the mix of workstation versus modality is not a one for one. So you combine that with discounting, or volume pricing for a larger customer, and it looks like there is price erosion.

Your other point was also well-taken, and that was that there is market mix. And we did have a higher volume of international sales, which again is at a transfer price, not at end-customer pricing. So if you add that and just taken a rough average, it's going to look like there is, again, pricing erosion.

Having said all of that, yes; there is pricing erosion, as we had predicted. We think that level is somewhere in the 5 to 7% range. There is competition. Obviously, as a last resort, have gotten much more aggressive with pricing in certain markets. If they're trying to buy market share in a certain territory in the United States. If we're displacing market share in certain countries. So there is not any standard model. But it is really -- the pricing that you've driven by way of that simple average is the result of the three things that I just mentioned.

So, Rob, in the quarter, though, clearly it was more than 5 to 7% price erosion. This seems more of a blip, and you'd expect it to (inaudible) going forward.

This was really a function of both product mix and market mix, combined with price erosion. So if those repeat themselves, relative to larger systems with a product mix or configuration difference, then you're going to have a simple average change in pricing; could go up or down, but as a result of that. And also, from a market mix perspective, domestic versus international, you're going to see that as well. There is really no simple answer, other than that we manage our mix, but it's a customer demand in terms of configuration. So as a result of that, we really are at not the mercy, but we really do have to assume that mix differences are going to have a significant impact on our margin, positive and negative.

Fair enough. You alluded [at the beginning of the call] to increased interest expense. Are we still safe to assume that you're kind of confirming your combined Cytyc/Hologic guidance of 2.35 to 2.40 for fiscal '08?

Yes, we are, Jason. We have not changed that. The point earlier was we appreciate that the credit markets are changing on us a little bit, but number one, we have a firm deal. We have the financing in place. Number two, I think at the end of the day it might cost slightly more on an interest expense basis. But we have to remember that the piece that might be slightly more expensive is the pre-payable portion that will be rapidly paid down in full within the three years. So within the first year, a third of it, hopefully, will be paid down, and we'll get out of that interest cost fairly rapidly. So at the end of the day, when we see the increase in the interest rate, it has a pretty minimal impact on what our expectations were. But, yes; it is part of what we will factor in. We will update our guidance once we have the combined entity. But we are comfortable with the previous guidance and the previous range.

Last couple questions here. Just on Suros, the impact of Celero; I think you mentioned $1 million. Is the availability of that product allowing you to enter or break open new accounts, or is it simply kind of just selling deeper into your existing base?

It's a little bit of both. If we think about it, what we tried to do tactically on its initial release was go to our strongest accounts and make this product available to them. Because what it does is it expands utilization within the account to the core needle biopsy market versus the vacuum-assisted market. The plan is, however, is a much more broader rollout in those accounts that we have called on for ATEC that happen to be Mammotome accounts, let's say as a for instance; we now have an access point to go in with a new product, introduce both the Company, its product and people, with the introduction of a core needle biopsy alternative, which then leads us into other products, not even just the ATEC for vacuum-assist, but the MultiCare Platinum for (inaudible) guidance, the Selenia for digital. So we plan to use that in a much broader way to get it into accounts that otherwise we have not had access.

Lastly, on the osteoporosis business, understandably the comps are getting a little easier here as you anniversary kind of reimbursement noise. What can you do differently to potentially accelerate growth, or start seeing some growth in the osteo business?

We are having pretty good success overseas, and I don't want to ignore that as a (technical difficulty) in our business. Domestically, what we're looking at -- and you're absolutely right; that market and that product have taken a hit as a result of the expected reimbursement declines -- number one, DRA initially, and in the four-year phase-in under the CMS, or reduction in RUVs. But when we look at the product, we're looking at a financing scheme that ties us into a three-year financing that we're going to go to the market with. It allows the customer, our physician, to really recover costs through a financing under an FMV lease. And in fact, if reimbursement declines further they can walk away. If there's recovery on reimbursement over this period as the market starts to dictate because women won't have enough machines out there to get scanned for osteoporosis, then they can buy it -- buy that out at the equipment's fair market value. But near-term it's a three-year window, FMV financing, that allows our customer to manage the reimbursement climate.

Isaac Ro, Leerink Swann.

Just regarding placements for Selenia in the upcoming quarter, is it fair to assume that the pacing of these placements could be a bit back-end-loaded, given just normal seasonality? How should we think about that?

You mean our placements in terms of installations?

Yes.

We're very linear. We have 500 systems in backlog, so we very well know where those systems are going. And unless there is a customer change, the installation and revenue of Selenias is quite linear throughout the quarter. Order rates are certainly different, and that's typically based on much demand happening at the end of the quarter, as there's an acceleration in interest and much more deal-making.

Great. Regarding the osteoporosis business, I understand that it's a relatively small part of your overall revenues now. But would you consider taking steps to maybe trim expenses there to improve the operating profit?

We have done a tremendous amount in wringing cost out of the product. And that has been the initiative thus far for throughout 2007. I think we're going to start seeing the benefits of that in 2008 relative to that cost structure. I'm not certain if there is a lot that we can do to cut expenses. We've trimmed back on R&D. It's really going to be a matter of cost of sales at this point. And I think we're going to see improvements in gross margin as a result of changing the cost structure and increasing the contribution rate of it.

The last housekeeping item on analog mammo for the quarter. Could you give us the number of units you sold, and any change maybe in pricing in that part of the business?

There really wasn't much in the way of pricing on the analog. We sold 147 units this past quarter. And to remind everyone, it was 157 last quarter. So it was fairly stable. And it was just under 6 million in revenue for the quarter.

Junaid Husain, Soleil Securities.

Jack or Rob, the preliminary 2008 reimbursement rates came out a couple of weeks ago. Do you have any comments here? Relative to imaging modalities in general, not specifically for mammography, but in general, CMS has been trying to rationalize the imaging codes of late. Does reimbursement ever make you nervous, especially as we've got an agency that's looking to pare back some of the non-mammography imaging codes?

I'm always nervous, everything that CMS does. And we've looked very hard. We're working closely with them and with our advisors in Washington. And mammography, as you could sense, is (inaudible) and as a matter of fact we get a little bit of an uptick on some diagnostic sides. But there was a major impact, obviously, from last year with DRA and CMS cuts, and the goal of, quite frankly, moving some of the procedures from the outpatient setting back to the hospitals, which is the antithesis of what they did years ago, because they found out it was inefficient and very costly to try to have procedures in the hospital, and they moved it outside. And all this being said, we wish there was greater continuity. But they have a formidable task, because you have stakeholders that all make some very, very good points relative to kind of where and what they would like to see. And with a, obviously, growing deficit under the current administration, they're looking to make cuts any way they can.

In future years, we would hope that the government that continues to go around the country talking about preventative health will look upon bone densitometry studies, and mammography studies, and pap tests as, clearly, the three mandated screening tests by Congress that should be almost outside of a standard reimbursement scheme, because it's all about screening. And CMS -- we did have from former director [McCollum] a really sympathetic ear to that. And I think he saw this, especially relative to bone densitometry and to mammography. But we're dealing with new folks right now that are kind of getting their feet wet. But we're putting a major effort out this year to continue to work with them as we did last year. And it's our hope that we can bring back some sanity to the reimbursement on the bone densitometry side. But mammography has -- it's been under-reimbursed forever. It is still under-reimbursed, and we would like to see, quite frankly, them look again at trying to raise the reimbursement so access is not limited to women, especially in underserved markets.

Switching gears just a bit, if I might have a few questions on breast Tomosynthesis in general, not specifically related to the clinical trial. Again, another reimbursement question for you -- I hope it's fair game. Do you guys anticipate going to CMS asking for a separate breast Tomo CPT code? I realize there's a lot of heavy lifting involved when you look for a new code. So, during the initial launch of Tomo, would the radiologists just use the digital mammo code first, and then maybe you guys would look to get a modifier code? Just help us understand the reimbursement dynamic for Tomo.

We're already involved in that process. And it is certainly the goal of this company. And I would assume, those companies like General Electric or Siemens, that are the only other players that are competing in this market, would also go for it because of the benefits of Tomosynthesis.

So, on a short-term basis, if you had approval today, you wouldn't have a separate code, and you would have to use the digital code. However, we're optimistic because of the clinical statistics from a variety of studies that have been done that with the benefits, that there can be some incremental funding for Tomosynthesis. But that being said, you've got a long road to go. It takes a couple years to get it. You first have to get a CPT code. But we have made -- we have made contact. We have had discussions with CMS. And we will actively continue down that road for a code.

Great. Last question for you. On the BioLucent front, Jack or Rob, could you tell me, of the 20% of the mammography centers that you said are using the pad, what portion of this 20% represents Selenia sites? And then as a follow-up to that, help us understand how BioLucent plays into your overall mammo strategy? Thanks very much.

Rob?

On Selenia, and on digital mammography in general, we would say that about 15 to 20% of the BioLucent business has gone to digital. It was a much more recent undertaking for them, and they had been focused on many of the accounts that had not converted yet and were analog sites. That, obviously, is changing. And when you look at even the customer mix of BioLucent of recent, there's been predominantly much more -- many more closures on digital mammography sites. And a significant number of those really are our sites because of just the normal distribution. So if we're at a 60% market share, 60% of what BioLucent was selling as a digital -- to a digital site would have gone to one of the Selenia customers.

Going forward, it's a much different dynamic. Every Selenia, every imaging product, for that matter, that we (inaudible) will incorporate the pad. So when we're selling digital mammography, when we're selling (inaudible) biopsy, and even analog to the extent that we sell those domestically, the pads and a sample kit of pads will be -- will accompany that product. Our applications training specialists will train technologists in both the use of the system and the use of the system with the pad, so it will become a fundamental part of our clinical applications. In addition to that, we'll have a dedicated disposable team, which will be the BioLucent team complemented by our other disposable sales reps, all calling on accounts to add the follow-up procedure. So the dynamic changes dramatically in that the modality vendor, meaning Hologic, is now supporting the sales of the pad.

Bruce Jackson, RBC Capital Markets.

Looking at the Selenia backlog, what are your expectations for that in Q4?

That's all based on order rates, and we have no reason to believe that our order rates are going to taper off at this point. So we're looking at stabilizing backlog, as we tried to do this past quarter.

And then, at what point do you think that backlog is going to start to go down?

I think it's much more of a question of, obviously, comparing orders to revenue. And our goal is to try to maintain a backlog level in this 4 to 500 unit range. But we'll be shipping more on a quarterly basis, so the days outstanding of backlog will be compressed, if you follow what I'm saying. None of us really matter or are concerned if we have a 500-unit backlog, but that only represents a 90-day turn in terms of customer demand. It's much more about managing the order rate. And we're happy with that level of backlog because it does give us the ability, as I mentioned earlier, to really ship on a linear basis.

Last question. I was wondering if we could get your updated thinking on some of the competing modalities that are out there, like breast MRI or positron emission tomography.

We think all are exciting. We think all have a very specific place and a very good place. The technologies have gone very, very far in terms of complementing what we do from a screening mammography perspective and a diagnostic mammography perspective. We view MR, we view PET, any of the fusion technologies that are being considered in terms of development, as being adjunctive, and most meaningful and helpful from a clinical outcomes perspective. The $54,000 question, however, is we also don't believe any of them are appropriate for screening.

(inaudible), [Beacon Capital].

I have a quick question. (inaudible) I understand that Goldman Sachs committed the bridge loan. I'm just wondering, how about a permanent loan to anyone committed to finance the deal?

The Goldman Sachs commitment is for the full amount that we would require for the financing itself. And we would have different strategies as far as piecemealing that out over time. The initial thought was that about one-half of that total would be converted into a term loan, a pre-payable term loan, right before the closing. And that's still the anticipation. And the balance would be a drawdown on the Goldman line. And then a week or a month later, whatever worked from a marketing standpoint, we'd do some kind of equity linked debenture such as a convertible for the remaining piece. But as far as the closing, there is no need to raise any additional financing to get the deal done.

It appears there are no further questions.

Thank you, Angelina. With that, let me wish everybody well. We're excited for the next time that we get together. At that point in time, hopefully, we should have our -- our year-end will be finished, we'll have been combined with Cytyc, and we'll be looking for a wonderful future together. So again, good health to everybody. And we'll talk to you in, I guess, early November. That's all. Thank you.

That does conclude today's program. We appreciate your participation. Have a wonderful day.