Hologic Inc (HOLX) 2008 Q2 法說會逐字稿

Welcome to the Hologic, Incorporated Second Quarter Fiscal Year 2008 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 call over to Jack Cumming. Please go ahead, sir.

Well, thank you very much, Angelina, and welcome, everybody. Good morning. Good morning. Today's our second quarterly conference call for fiscal 2008, and joining me on the call today will be Dr. Jay Stein, our Co-Founder and Chief Technology Officer; Pat Sullivan; our Executive Chairman; Rob Cascella, our President and COO; and, of course, Glenn Muir, our Executive VP and CFO.

Before proceeding, let me remind everyone about the safe harbor statement accompanying our press release as it applies to comments made during the call.

Of course, we're pleased to share with you our fiscal second quarter results for the period ending March 29, 2008. As is normal procedure, I'm going to briefly touch on the highlights, while Glenn will provide further details on our operational progress, as well as guidance for the remainder of fiscal 2008, and then, of course, we will then open up the call for questions.

To begin with, a little more than six months ago, we completed the acquisition of Cytyc, and all of us have been extremely busy in terms of aligning the companies and setting a framework to maximize resources. And I'm pleased to report that alignment efforts are progressing very well. We have a great global team, and everyone is working extremely hard to utilize the talents and the resources of both companies.

I'm pleased to report that this marked our 17th consecutive quarter of increased revenue and adjusted earnings growth, and let me take a few minutes to summarize some of these results.

As stated in our press release, fiscal 2008 second quarter revenues totaled $431 million, which represents 138% increase over the second quarter of fiscal 2007.

On a pro forma basis, including the former Cytyc, revenues rose 23.1% for the same period.

For the quarter, our non-GAAP adjusted net income increased 218% to $76 million compared to our non-GAAP adjusted net income of $24 million in the second quarter of fiscal '07.

On a GAAP basis, we reported net income of $56 million, or $0.22 per diluted share, which included one-time, non-recurring, and other charges, which Glenn will more fully describe in his portion of the call.

Highlights of the quarter --

Breast Health revenues were $223 million for the second quarter, which represents a 41% increase over the $158 million for the same period in fiscal '07.

Selenia, full-field digital mammography, system sales, together with R2 CAD continued to set quarterly records. As you remember from our last quarterly conference call, we forecasted 395 Selenias for the second quarter, and once again, we surpassed our target by recognizing 418 Selenia systems as revenue in Q2.

The Diagnostics and GYN Surgical business, with sales of $180 million, posted a 12% increase in total revenues over the comparable March quarter one year ago, led by solid growth internationally, with sales up 32% and, of course, the inclusion of FullTerm.

As we reported on last quarter's conference call, we introduced the concept of relationship selling versus transactional selling to our GYN sales -- surgical sales associates at our national sales meeting held in January of this year, with special focus on increasing utilization of NovaSure in the physician's office.

For those of you that may be new to the Hologic story, our GYN surgical sales associates currently sell NovaSure, which is a device used to perform minimally invasive outpatient endometrial ablation procedures for the treatment of menorrhagia, or excessive uterine bleeding.

Over 2.5 million women are being treated in the U.S. for menorrhagia, with approximately 1.4 million women being prescribed hormonal therapies generally to address this condition.

With ACOG's expanded guidelines on recommending treatment of this indication with endometrial ablation as a first-line approach to address heavy bleeding, these 1.4 million women become our prime market to transition to a NovaSure procedure.

Therefore, it is management's belief the key to continued success of the NovaSure business is securing longer-term order commitments from the office-based practitioner and, therefore, creating more of an annuity revenue model, which moves us away from Cytyc's past practice of a more transactional approach, which focused on securing short-term orders with shipment generally in the same quarter.

We are now highly focused on growing annual standing orders from the office-based market, which will allow us to focus on increased procedure volumes while lessening the reliance on current order bookings.

The near-term impact will be lower quarterly expected revenue for Q3 compared to Q2. However, Q4, we're going to show sequential growth over Q3, and it will mark the beginning of getting product growth back on track, with office-based backlog playing a key role in the future.

And it's very important to note that although Q3 revenue will be lower than Q2, there will be a corresponding increase in backlog which will be recognized in the future as revenue upon shipment, and our goal is to draw approximately 30% of quarterly revenues from backlog after the sales force has sufficient time to fully present the program benefits to the physicians that perform office-based procedures during the next year.

What is important for everyone here to understand is what this program is going to do in building backlog. It's going to eliminate these quarter-ending AUP erosions that we have seen because there's going to be less deal making, which is going to result in improved gross margins. It's going to improve our factory loading by shipping more linearly, and it's going to result in improved inventory management and lower costs. And, finally, it's going to increase office-based procedures, which will lay the foundation for the adding on of sales down the road.

In summary, we're pleased with our continued progress, driven by the sales of our Breast Health products, with continuing market gains by our Selenia full-field digital mammography system. We are also committed to continue to focus on costs and organizational alignments to drive operating efficiencies, and we look forward to building upon this quarter's success throughout the remainder of fiscal 2008 and to continue to enjoy the growth that we have internationally as a precursor to future gains across all product lines.

And with that, let me turn the call over to Glenn. Glenn?

Thanks, John.

I will now expand on the financial results of the quarter. My comments are also summarized in a PowerPoint accessed on the IR page of our corporate website at Hologic.com.

My presentation today includes certain non-GAAP financial measures and a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP counterparts, as set forth in the same PowerPoint presentation at Hologic.com.

This quarter represented the first that included revenues from the product lines acquired in the merger with Cytyc for the full quarter. Last year only included 10 of 13 weeks.

Revenues of $431 million were 23.1% higher than the March quarter last year on a pro forma basis, including Cytyc.

Included in our GAAP results are two acquisition-related charges that total $31.6 million for the amortization of intangible assets and the inventory write-up to fair market value related to our acquisition. Absent these acquisition-related charges, our pre-tax earnings for the quarter would have been $119.1 million, and using our effective tax rate of 36%, net income would have been $76.2 million, or $0.29 per share. That's based on 260 million shares outstanding.

Revenues for the quarter came in $16 million higher than expected, led by an increase in Selenia sales.

Our consolidated gross margins, adjusted for the acquisition-related charges, were 61.6%, just under the range of 62 to 63% we were expecting.

Absent a $2 million inventory charge for our MRI Extremity product line, our gross margins would have hit 62% within the targeted range for the quarter.

Our operating expenses, again absent the acquisition-related charges, were $127.4 million, slightly below the $130 million we were expecting. This combination of increased revenues, higher gross margin dollars, and lower operating expenses are what contributed to the better-than-expected bottom-line results. As a reminder, our guidance was for non-GAAP adjusted pretax income of $110 million and EPS of $0.28, which was based on 254 million shares outstanding.

We now have four reporting segments, and I would like to touch on each briefly.

First, our Breast Health, which is our largest, accounted for 52% of sales and includes product lines from mammography, R2 CAD, Suros Breast Biopsy, MammoPad, DRC digital detectors, the AEG Selenium coatings, and the MammoSite Breast Brachytherapy. This segment is also our fastest growing. It's up 41% year over year, fueled by sales of digital mammography and the addition of the two new product lines, the MammoSite Breast Brachytherapy product and the MammoPad comfort cushion.

Since the MammoSite product line was acquired in the merger with Cytyc, on a pro forma basis, if we include MammoSite in their year-earlier period, our revenues increased 35%.

Our four main product lines all attained a new quarterly sales high. This included digital mammography, R2 CAD, Suros, and MammoSite. The expectation is for sequential growth in these four product lines in Q3.

But it was, again, Selenia that led all product lines in growth. Sales of Selenia, together with CAD, increased to $120 million versus $107 million last quarter. This included the sale of 418 Selenias, up from 384 last quarter, and higher than the 395 we targeted as demand continues to outpace our expectations.

Domestically, we shipped 319 Selenias, and internationally, we shipped 99. In the U.S., 95% of Selenias were shipped with digital CAD. It's become standard. And as Jack stated, at quarter-end, our backlog of Selenias stood at 535, down 43 from the end of December.

Our goal has been to begin to reduce backlog to shorten the lead-time for shipment to our customers. This quarter, we took 375 new orders, which was higher than last quarter. Historically, Q2 has been our weakest order booking quarter, and we are encouraged by the order trends we are seeing. Based on early Q3 activity, we expect new orders booked in the current quarter to increase again.

Selenia ASPs this quarter, as with last quarter, are stable. The primary drivers for our Selenia ASPs are not competitive factors as much as geographic mix, the product hardware configuration, and either follow-on or repeat orders. If anything, this quarter, we saw an increase in workstations and tech aids, which would push up the overall order sales price a bit but also depress slightly the gross margin percentage due to the mainly hardware component nature of the added products.

For the quarter, though, our gross margins in the Breast Health segment increased slightly to 51%, up from 50% in the December quarter and 48% in the year-ago March quarter.

(If) we move to Diagnostics, our second-largest segment accounted for 29% of sales and includes the ThinPrep and FullTerm products. Revenues in this segment increased 16% over the comparable quarter of the prior year due to the inclusion of the FullTerm product for the full quarter and increasing sales of the Imager product. The ThinPrep product revenue met our expectations with domestic tests coming in at 8.8 million for the quarter. We are continuing to expect between 8.7 and 9 million tests in the U.S. market each quarter.

Revenue growth is coming from international ThinPrep sales, Imager sales, both domestic and internationally, and the addition of FullTerm in the most recent quarter.

Looking at GYN Surgical, our third segment accounted for 13% of sales and includes the NovaSure system and the future Adiana product when the FDA approves.

As discussed, we changed the focus of our sales and marketing efforts for NovaSure this quarter. Although quarterly revenues were up 3% year over year, revenues declined $5 million from the immediately preceding adjusted 13-week December quarter. We have shifted emphasis away from hospital-based all-purchase programs to individual use in the doctor office setting to stimulate long-term usage.

The key to future growth is making NovaSure the easy choice and the first line of treatment for women. To accomplish this, sales to the GYN surgeon for use in their office is critical. The greatest potential continues to be the majority of women who are first treated with hormonal therapies. This quarter began our shift in focus to this larger market opportunity.

Our fourth segment, Skeletal Health, accounted for 6% of sales and includes the Osteoporosis Assessment, mini C-arm, and the MRI product lines.

This business continues to be challenging and affected by concerns over reimbursement uncertainties. That said, revenues were up 15% from December and 21% from Q2 last year due to an increase in the number of bone densitometers and mini C-arms sold. We expect sales to be fairly flat for the balance of this fiscal year, but earnings are expected to rebound since Q2 was affected by an inventory charge.

Regarding our share count this quarter, our total fully diluted shares outstanding increased to 260 million versus our expectation of approximately 254 million shares, primarily due to the exercise and granting of additional stock options in the quarter. We are expecting the share count to only increase slightly from the 260 million in the remainder of the fiscal year.

On the balance sheet, the one primary item to note is the term loan balance, which is now only $90 million. The term loan started at $1.1 billion in October and was paid down to $295 million at the end of December. This quarter, we paid down an additional $205 million and expect it to be fully repaid this fiscal year, two years ahead of our initial goal.

If I could now switch to our guidance for fiscal 2008, and first starting with Q3 '08, our current June quarter, we expect continued increase in total revenues and an improvement in gross margins, both sequentially and compared to the prior year. The expected growth is primarily from our Breast Health segment, increased demand for Selenias with R2 CAD, and more adoption -- rapid adoption of the Suros biopsy devices.

For Selenia, we are targeting sales of 425 systems for the quarter, which is seven more than this past quarter and would result in an approximate $2 million increase in revenues.

For the Interventional Breast Solutions Group, which includes our Suros biopsy tool, we are expecting another $2 million increase in revenues.

And then, third, with our Service Group, is also expected to contribute with an increase in revenues of $2 million.

This sequential increase of $6 million is expected to be offset by a 2 to $3 million decrease in digital detectors sold to Siemens. As we have discussed before, we made the decision last July to exit the business of providing our detector to other OEMs for use in their products. Our contract with Siemens is ending next year, and they will be decreasing their orders with us.

Although the impact is negative short-term, it is very much a positive long-term and will help further differentiate Selenia. This would put consolidated revenues at approximately $435 million.

Consolidated gross margins are expected to hold at 62%. This does exclude the amortization of intangibles.

Combined operating expenses are expected to be approximately 133 to $134 million, or 31% of revenue. This also excludes the amortization of intangibles.

In Q2, our operating expenses came in about $3 million less than expected, which was primarily due to the timing of certain R&D projects and clinical trials, which were pushed into this quarter, or Q3. As such, we are expecting to see a 6 to $7 million increase in operating expenses this quarter.

Due to the rapid pay-down of the term loan, the interest expense is expected to drop significantly in Q3 to approximately 16 to $17 million.

When compared to Q2, the third quarter should see slightly higher gross margin dollars from the higher revenues, lower interest expenses, and higher operating expenses. Bottom line, we are expecting net earnings to be comparable to Q2 and to increase again in Q4.

Next, our outlook for fiscal 2008, which ends next -- this September 27. We are looking forward to another year of quarterly record revenues and earnings. For fiscal 2008, we are looking for total consolidated revenues of $1.7 billion in our four reporting segments.

First, in Breast Health, we're forecasting approximately $880 million in revenue. That would be 52% of our total, representing approximately 30% growth over fiscal 2007, which is primarily attributable to an increase in Selenias. This is up from our expectation of 25% growth last quarter. We are now projecting a year-over-year increase of 466 Selenias, bringing us to 1,655 Selenias in FY '08, up from 1,189 Selenias in FY '07. This is also an increase of 75 Selenias from last quarter's guidance of 1,580.

Second, in Diagnostics, we are forecasting $480 million in revenue, representing approximately 12 to 13% growth over fiscal 2007. This is due to an increase in international ThinPrep sales, worldwide growth in Imager revenue, and the FullTerm adoption.

Third, for our GYN Surgical, we are forecasting $215 million in revenue, which is flat with fiscal 2007, as we reposition the product in the primary care channel and continue our overseas expansion.

And, fourth, in Skeletal Health, we are forecasting $110 million in revenue. This is up 10% from the year before as we are beginning to make inroads in primary care.

For gross margins, we are looking for combined gross margins of approximately 62% on an adjusted non-GAAP reporting basis. This excludes the amortization of intangibles.

And for operating expenses, our combined operating expenses are expected to be 510 to $515 million for the year. These also exclude the amortization of intangibles, which are expected to be about $29 million so that operating expenses are expected to be approximately 30% of sales. This is $5 million less than what we expected last quarter as we continue to streamline the businesses.

Included in the above are approximately $22 million of FAS 123R stock compensation charges. We have not backed them out of our guidance but will indicate what they are quarterly and also disclose them in the press release.

For interest expense, at March 29, we had $1.725 billion of a convertible note bearing interest at 2% and $90 million left of the term loan at a LIBOR plus 2.25 to 2.50 interest rate. In addition, we have about $12 million of a revolver that we used in Germany to fund our AEG operations.

We now expect to completely repay the remaining term loan balance this fiscal year, all within one year and significantly ahead of schedule. As such, our interest expense is expected to continue to decrease both this year and, even more significantly, next year. For this fiscal year, we still believe that total interest expense will be approximately $80 million.

Even though the cash payable to the bank for the interest owed is increasing, it is offset by an acceleration in the amortization of deferred financing costs in the current year as the loan balance will be fully repaid.

Our effective tax rate for the year is expected to be 36%, and we are expecting the shares outstanding to increase only slightly above our current 260 million in Q3 and Q4. This should result in a weighted average number outstanding of 252 million for the year.

Based on all the above, we are continuing to expect non-GAAP adjusted pre-tax income of 450 to $455 million, and our EPS guidance for FY '08 on an adjusted basis, 250 million shares outstanding, would be $1.15 to $1.18, which equates to the pre-split EPS of $2.30 to $2.35. This is also absent the effect of merger-related charges, such as that in-process R&D charge and the amortization of intangibles.

This guidance is consistent with the range we were comfortable with at the beginning of the year.

And with that, let me turn it back over to Jack. Jack?

Thanks, Glenn.

In closing, we believe we're making some solid progress on multiple fronts, and -- which will, of course, secure our future growth for years to come. Tomosynthesis, of course, is one example.

The Tomo project is going rather well. We're in regulatory discussions with the FDA relative to our filing status, and we believe that we're proceeding as originally planned. In addition, we have begun shipping a limited number of beta systems that are being built to support this phase of our development efforts. These systems are intended to allow us to bear access to clinical utility of the exciting new Tomosynthesis technology.

And we're also working on the design of multiple clinical studies which are intended to assist us in the support of advanced applications and the development of a reimbursement rationale.

And, finally, we did a soft launch of the system in Europe at this past European Congress of Radiology meeting that was held in March, and our goal is to sell the product in limited quantities to strategically [seed] outside the U.S. market and to develop valuable clinical use data. These systems are planned to be installed sometime in our fiscal '09 first quarter.

With respect to Adiana, we continue to communicate with the FDA on finalizing all open aspects of our clinical study requirements, and our hope is that the most -- that this most beneficial technology can enter the U.S. market early in our fiscal -- second quarter of fiscal '09. We will also do a limited release of the product in selected European markets sometime during Q1 of fiscal '09. In addition, we're preparing our infrastructure to support the manufacturing of this product.

To elaborate a bit more in integration, we have completed multiple cross-selling initiatives throughout the Company, and these have helped to leverage our OB/GYN diagnostic team, which will provide lead generation for the Bone Densitometry products and our Breast Surgical sales team selling and supporting our biopsy products. These are all new channels of distribution for us.

Also, at this year's ACOG meeting, which starts this coming Monday, we will feature a Selenia system to promote our distributed mammography strategy and [hub/spoke] concept of bringing world-class breast imaging technology and clinical expertise to all women, and I hope to see some of you there.

We're focused clearly on long-term growth and enhancing shareholder value. Each step we take today has a single focus. We're going to seize every opportunity available to us to profitably grow this business, and the steps that we've taken with NovaSure is one example of how -- our long-term commitment to building a stable business with solid backlog to ensure steady growth.

In addition, we're focused on increasing our presence in international markets with both surgical and diagnostic products, and we intend to leverage our success with FullTerm to aggressively penetrate the at-risk opportunity and are planning a rollout of our permanent contraception technology that will benefit by the foundation we are laying in the office space gynecological market.

We're not going to mortgage our future for short-term gains as we feel each of these opportunities are fundamentally strong and our products are decidedly superior.

From a purely performance perspective, we've made steady progress towards our long-term goals of driving top-line growth, improving profitability, and controlling our operating expenses while maintaining the quality and the reliability our customers demand and have come to expect from us.

And to all of the Hologic associates worldwide, I want to tell you from my perspective without a doubt there is not a better team of more dedicated, highly professional, passionate people in this industry.

After 30 years in this business, I finally get it, and perhaps it's because I'm a slow learner or because I've never had the opportunity to surround myself with such a caring, dedicated, and motivated team of individuals. We are women's health. We're the leader, not just because we're the technology leader, not because we truly deliver the best service consistently, not because we're the market share leader in nine categories we compete.

We're women's health because we have people that have a mastectomy on a Monday and are on the phone the same week with customers asking how they're doing and if they need assistance.

It's associates that have had cancer surgery on their spine and have their mother drive them around two weeks later so they can serve their customer needs instead of focusing on their own.

It's people that are going through chemo or radiation and go from the cancer center to the laboratory or the breast center to continue their days of sales, service, and application calls.

It is people giving up their vacations to go to impoverished lands to train people how to take mammograms, read pap tests, perform partial breast irradiation, help women with pre-term birth issues, perform bone density tests rather than relax at a resort.

We're a company of selfless people that have chosen to serve, that have a higher calling, and for this reason, we are women's health, and clearly, are number one in our markets, and I feel honored to have the opportunity to share in this success.

That being said, although we have succeeded on many fronts, it is clearly our belief that the best is yet to come.

Now, this concludes our opening remarks, and if we can now ask for questions. Angelina, if you would, let's go forward.

Thank you. (OPERATOR INSTRUCTIONS)

We'll take our first question coming from Eric Lo with Merrill Lynch.

Morning, guys. On the Selenia front, can you talk about where you think your market share is in the U.S. and outside the U.S., and where do you think that could go?

This is Rob. We believe we are running at somewhere north of 65% in the U.S. and averaging overall around a third of the international markets, with much stronger pockets in certain parts of the globe.

Have you guys been taking more share outside the U.S. lately?

Yes, we have. We have pockets of significant growth and market share. In parts of Europe and Latin America, the Selenia has gained traction above many of our competitors, namely, GE and Siemens, and [it's] one of Siemens' principal markets, so we're very, very pleased with how Selenia has emerged as the best-in-class digital mammography product really throughout the world at this point.

And, Eric, we did update our MQFA scorecard that's on the Hologic.com website, so we updated it through our March results. And in the U.S., our installed base is over 2,200 systems. So we are at, for an installed base size, 55%. So on a current run rate, we are gaining share above that 55%, so it's encouraging.

Can you also comment on where you think GE is in terms of their ability to ramp up capacity? Have you seen increased competition coming from them, either from the unit side? Also, perhaps, from the pricing side?

You know, I think that there is a nominal pick-up in terms of their availability, but again, it would appear that it is only in cases where there is a strategically significant account that we are both vying for.

In general, they are not offering the essential on a widespread basis, particularly here in the United States. We see a little bit more activity internationally, but no, I don't feel as if we've seen a meaningful increase in that product availability, and I also don't feel that they've become overly aggressive relative to pricing. I think they're selling product -- not to pre-suppose what GE's strategy is, but I think they're selling product based on what they believe to be appropriate pricing, which tends to be in line with where they have been in the past.

And we'll move on to our next question coming from Mr. Ed Shenkan with Needham.

Thanks. Jack, was wondering if you could tell us how many Imagers were placed in the quarter.

And, also, pricing for Selenia, we're guessing that it looks like it might have gone up in the quarter. Maybe you could comment.

Well, we're not giving out numbers on the placement of the Imagers anymore. I can tell you, though, Ed, that -- I mean the next question would roll usually to Quest, and that is that the rollout that we have done with Quest is going along very well. We expect over the course of the next year to be doing a majority of those tests with our Imager. Certainly, WebCorp has been a very valued user of our Imager, as are other independent labs. It is not the -- just the placement of the Imagers; it's (inaudible) to use those imagers, and we have maintained at about a 55% plus number of our slides being imaged, and that continues to rise.

As far as the pricing on the Selenia, I would let Rob answer that.

Yes, [Don](sic), with respect to [ADPs], we believe that with respect to Selenia, as Glenn had indicated during the talk, that they are stable. I think the perception of the mathematically calculated ASP is really driven by a higher content at some of the peripheral products that were included in this quarter's shipment, that being workstations and connectivity managers and things like that. So we don't see a decline. We think that it is stable. But as we have talked about relative to geographic mix and configuration mix, the mathematically driven ASP calculation might be a bit misleading. Gross margins, as an important indicator, are up for the quarter in that particular business.

And on NovaSure, it's surprising that you'd expect a sequential decrease going forward on the disposables. You'd think once docs are using your product and they like it, they're going to keep using it. Maybe you'll get fewer of the, what, $10,000-a-unit NovaSure controllers, but I would certainly expect these disposables to keep growing. Maybe you could walk us through why that should slow down.

Ed, this is -- that's an excellent question, and I would tell you, it's twofold. And, one, quite frankly, that we have been caught off-guard about this, genuinely surprised, as we've made this transition from hospitals to physicians because of the 1.4 million women that are being treated with hormonal therapies, what happens is that we have not as aggressively detailed the hospital market as we have in the past. However, there has been a softness in hospital-based procedures. I mean there's no getting around that.

Now, have we lost market share is a question that, believe me, we have been asking or asking our field people. We've been out in the field with them talking to doctors. The answer is we have not lost market share, but the number of procedures in the hospital has gone down. Whether it is a function of a soft economy because this is a procedure that is elective, that can be postponed, I don't know that. But there was clearly a softness in the market this past quarter, caught us by surprise, and we have adjusted, we think. Because of the programs that we have been marketing in the physician offices, we have been very encouraged by the backlog that we've been able to generate the first quarter and now into this second quarter.

And as to reiterate, we think these programs with the long-term commitments is certainly the key, but as I said, softness in the market, coupled with our shift into the physician market, certainly has been the result of the drop. We do believe that we're going to see the pick-up again in Q4, and that's fairly obvious from the trending we're getting today.

We'll go on to our next question coming from David Lewis with Morgan Stanley.

Hi, guys. It's Ryan in for David Lewis. The first question is on gross margins. Looks like you guys lowered the guidance for gross margins to 62% from a range of 62 to 63%. Could you provide some more detail that's -- the reason behind that?

Hey, Ryan, it's Glenn. I think one of the reasons is what we're seeing this quarter in Q2, which, as Rob indicated, even on the Selenias themselves, there's a hardware component that's increased beyond what we would have expected, and so when you do this mathematical calculation, it leads you to believe that the Selenia selling prices are higher. They're not really higher. We're selling more workstations than tech aids that plug into PACS systems that, frankly, we're surprised about. We've built up a good business with that product line, and it's being connected right into the PACS. It's very hardware, I think, captive, and it reduces the overall gross margin. There's not a huge margin on that. So we're seeing the revenues go up, but there's a little bit of an offset on that hardware side.

That's helpful. And I know you've made comments that pricing for Selenia has been pretty stable, but in the marketplace, there has been some chatter that their pricing has become more aggressive on -- from competitors, such as Siemens and Fuji. Can you comment on what you're seeing there?

Those are just on Jack's deals.

Yes, I think, in general, we have seen Siemens, as typical for Siemens, really look to approach some strategic Siemens hospitals -- or accounts with very aggressive programs. There are a handful of those. In some cases, we will attempt to present a competitive bid. In other cases, we just -- we simply can't because they are too low. We don't see that frequently. We see that, as I say, in very selected accounts, but typically today, it has been Siemens that has been the low-priced competitor.

Which is disappointing in that Siemens has always been one of the higher-priced competitors out there and have always held their margin. They're under certainly a lot of pressure in different areas right now. Their MR and CT have done extremely well in the market. I think it really is in response to slipping in market share as compared with certainly General Electric and ourselves, and it's been an attempt to make placements.

And as I said earlier in the call, we're only going to do things to the long-term benefit. Doing deals that don't make sense, where you can't make even a reasonable profit on it, we'll leave that to them. But, clearly, our technology is still taking the premium by our [AUP]s, and we expect that to happen, and we also expect Siemens to come around and realize it's a failed strategy.

Okay. And then, lastly, on [Selmo], I just wanted to get an update on your thoughts on timing in a panel. I mean there's a radiology panel, I think, scheduled in August [and November]. Wondering if you're going to be on one of those or a little later?

We certainly don't know at this point. The expectation is that we can be earlier or participate in what is scheduled as the August panel.

Okay.

We are talking almost every week, so.

Okay. Okay, that's it.

And we'll move on now to our next caller, Mr. Amit Hazan with Oppenheimer.

Hi. Good morning, guys.

Good morning, Amit.

I wanted to follow up first on NovaSure, which seems to be the biggest concern for people right now. I'm hoping you can help us, first of all, in understanding what procedure growth in the U.S. was like last year and to what extent its slowed right now in this first quarter in the hospital setting, if I can first ask that.

When you say the hospital, obviously, was it about -- the procedures were about 20% last year because the number of the devices kind of follows the number of revenues. And this year, it has dropped down more in the -- I would say in the 10% area. Rob or Pat, do you want to add anything to that?

The only thing that I would say is that I think specifically to your question, I think the growth last year was more about displacing a current competitor in a market that had already established the need to do a minimally invasive procedure. What we're now finding is that we're changing a treatment pathway, and that's the rationale about why that is a better battle to be fought at the office-based market versus the hospital market.

Pat, do you want to add any?

Yes, I would say that traditionally we had seen since 2003, when we first took a look at Novacept, that the procedure growth that we anticipated was about 50,000 procedures total market per year, and I think that, for the most part, NovaSure got the lion's share of that.

And I think as we've moved the strategy to really focus on the office-based procedures over the last couple of quarters, historically, Cytyc focused on that and put programs in place that really allowed the doctors the capability to do that testing in their office.

And I think as Rob and Jack had both mentioned, the challenge now is to get the doctors to actually increase the number of procedures that they're doing in the office now that they have the capability with the controllers to actually do that, and that's the strategy going forward.

And part of the slowdown, Amit, is that if you said -- if the doctor said, "I think I want to -- I'll do them in the office," they're not going to do them tomorrow because they're going to have to then prepare their staff for it. In some cases, there will be some local anesthesia for people, so they're going to have to work through how that actual process is going to take place. So there's going to be at least a window of time where they prepare for that and how it's going to be scheduled within the facility.

And we'll take our next question coming from Tycho Peterson with JPMorgan.

Hi. Good morning. Thanks for taking the call. Maybe just following up on the NovaSure trends here, I guess is there any change to the underlying sales force here? And, also, can you comment just on physician education as you move to go deeper in your existing in-office channels? You know, how do we think about spending and driving either clinical data or additional physician education campaigns?

Well, I think we can split that between Pat and I.

From the sales force, we did make a change in the sales force, which could've had an effect where we kind of bifurcated it, where we had people starting at the national sales meeting at the end of January just be selling to the NovaSure product and then the Adiana product. And people that were on -- selling the ThinPrep and the FullTerm product but were also talking about NovaSure and introducing the concept and selling it, they now are focused clearly on diagnostics.

So we have really two separate sales forces, one doing diagnostics and one doing surgical. So there certainly could have been an interruption in the flow of that as we came out of the gate out of the national sales meeting, and I think that Pat's certainly in a better position to talk about the education, as he's been the champion of getting that over the number of years.

Yes, I think that when you look at the total number of what we call territory managers focused on NovaSure, the number has actually increased slightly over where it was last year, too. We typically had 100 folks, so now we've got north of that as a result of preparing for Adiana, but I think we did split the sales force to focus, one, specifically on the office-based diagnostic procedure, as well as focusing on the FullTerm product, which we have a major strategic focus on, and then give more attention and focus on to the -- onto NovaSure.

I would say that we have done and continue to do a fair number of physician education, doctor-to-doctor selling events that we have found historically are very effective.

Okay. And then on ThinPrep, it looked like it was down a little bit quarter over quarter, but you're still within your kind of target growth rate here. Are you seeing any market softness?

And then, also, I know [Becton] has talked about getting a claim on the Digene HPV test, and if you could just talk about how you view that, that would be helpful.

Well, I'm going to let Pat talk about his favorite subject (inaudible), the HPV. I would just tell you that we do not see any softness in the U.S. The number of tests is what they have always been, and Pat, aren't you surprised no one has actually asked us about the test?

There's growth internationally. Quite frankly, what Pat had said for several years, I'm only echoing in that the market clearly is international growth. We're very happy with what's happening there. We've got a great team throughout the world, and we've got -- we've seen a lot of benefits coming out of our European office and Australia office. We're now moving into the Asian operation, where we've got a service office in Beijing to help with our distributor there, and we are having a larger office for a presence in Hong Kong for all of the products. So we're not seeing any softness.

And, Pat, maybe you can talk about your favorite subject.

Yes, well, the TriPath Imaging has tried -- has failed twice now with the FDA of getting HPV approved, the Digene HPV-approved test out of their vial. It still has the same limitations it always has had, and I would find it interesting to believe that it may ever get an HPV approval out of the vial. I would say that even if they did, at this late point, it really wouldn't make a whole lot of difference because, in fact, most laboratories are offering it anyway as a self-validation that they do in spite of the fact that it's not FDA approved.

And in terms of the Imaging device, we've also heard that TriPath Imaging has submitted data to the FDA. Again, that's another product that they have put before the FDA twice, and it's been rejected, and I don't think it would change the dynamics in the marketplace at all even if it were approved.

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We'll take our next question coming from Jayson Bedford with Raymond James.

Hi. Good morning. Just a couple quick questions, and I hate to beat the NovaSure issue here, but it seems like the concerns are around the surgical and gross margin. I'm guessing that the two may be tied to some extent.

Historically, you seem to hold prices on the NovaSure box pretty well. I'm just wondering, in your effort to go into the office, are you discounting the boxes, or is there an active placement program that's been initiated?

We are not discounting the boxes. What we are doing -- and not giving all of our strategies away -- certainly, for a long-term commitment from the doctors, where they're buying the devices over an extended period of time, there is the ability to be able to secure some favorable pricing. But you would've not seen that today if -- you're only going to see it as quarters roll on if, in fact, they have done the volume that they would say. So that's going to be far out, but you'll see volumes up because of that. So it hasn't been us out discounting or giving away controllers. It hasn't been that at all.

Okay. And is the -- the effort into the office, is it focused on moving folks from the hospital to the office, or is it primarily in opening new office accounts?

Well, it's -- there are a lot of people trained already on this that are doing the procedure, an ample number in the hospitals. It is having those folks doing the procedures in the hospital to do it in their offices. That's the primary target.

Okay, fair enough. And just, lastly, on Selenia, of the orders, how many would you guess on a percentage basis are coming from current Hologic customers versus perhaps stealing a competitor's market share?

I think that the way that we would look at it is that about 15 to 20% of our business today is coming from competitive accounts, those that were formerly a Siemens GE analog account or those that were formerly older GE digital accounts.

Thank you.

Thank you, Jayson.

We'll take our next question coming from Amit Bhalla with Citi.

Hi. Thanks for taking the question. I wanted to ask you a question on the total company backlog. Total product backlog at 379 was dramatically higher than the prior quarter and prior year. Probably ties into what you've been talking about, but maybe you could break down that total product backlog by -- maybe by segment just to give us a little bit more comfort in your guidance for the year. And I have another follow-up.

Yes, Amit, on that backlog, just to be clear, that backlog is total product backlog, so it includes the historical Hologic and historical Cytyc numbers. It's difficult to compare that to prior years. Cytyc never ran their business focused on the backlog, so we're not comfortable with any backlog numbers from a historical perspective from that group. So we're starting a new trend of beginning to capture that information as we move forward. So, unfortunately, this is the first quarter where we can really give a combined all-in consolidated number.

We probably won't give that going forward on an individual segment basis, although we will identify it for Breast Health, and, in fact, in the PowerPoint, it shows that the Breast Health was almost 200 million, so that one segment was almost 200 million of that entire total, which we would expect. I mean that's what you would expect with the growth in Selenia, and that business, 50% of the total anyway.

Okay. Do you care to just give us a rough idea of the split between the other surgical diagnostic -- I think I know the answer, but if you could say it.

I think you answered it.

Okay. I may have missed this. Selenia revenue -- I don't think I heard it, but could you give us that number or give us a rough idea of how Selenia revenue grew?

I know the Selenia revenue, and this is with the R2 CAD for this quarter, was $120 million. So that's up from Q1. That number was $107 million.

Okay.

That's really due to the growth in the number of Selenias from the 384 to the 418 this quarter.

Okay. And just a question a little bit longer-term. Can you give us a sense on how you're thinking about '09 or beyond gross margin and growth rate targets to get a sense of how you think the business is going to unfold as these newer strategies play out on the Cytyc business? And that's it. Thanks.

Well, on the growth strategies for the former Cytyc business is diagnostic. I mean we certainly do expect it to see growth. We're expecting 12 to 13% this year. Next year, I would say that we're looking at the -- again in that same type of range, in the 10%-plus range.

In the surgical range, in the surgical area, we're expecting -- right now with that softness, I dare say we would be in the high single digits. I will have a much better idea at the end of this quarter depending on (inaudible - technical difficulty) backlog continues to grow.

We are cautiously optimistic. We're not trying to sell you on something that isn't there, but the reality is this GYN surgical business is a good, strong business. It's a business that's doing north of $200 million with a very high margin. It is a business where we're at 60 to 65%. It is a business that all of a sudden in this past quarter we have seen some softness. There is no doubt that that is being monitored extremely carefully.

As I said earlier, we don't know how closely that is aligned to the economy. We do know that through education, through training, through peer to peer, doctor to doctor, we can increase the number of procedures being done, which is our total focus now, in the physician office. I mean, obviously, we want procedures to be -- to grow everywhere, but in the physician offices. With that growth, we're going to be able to reclaim some of the luster that the product has had. This is one down quarter that we're expecting. We're expecting it to go up in the fourth, and we're expecting it to go up beyond then.

So we'll get through this, and we expect the growth, let's say, at this point to be in the high single digits for next year, and we will clearly revisit that with you at -- on our next conference call and certainly at the end of the fourth conference call, as we always do. We'll be very forthright in where we are with these.

We'll take our next question coming from Charles Chon with Goldman Sachs.

Good morning, everyone. Thank you for taking the question.

Morning.

So with the soft launch of Tomosynthesis underway -- and I believe you indicated in the past that Tomo Manufacturing would likely ramp as we move into the summer timeframe -- can you tell us how capital intensive that ramp might be? Should we expect a spike in the use of cash as well as inventories in the third quarter and fourth quarter here?

This is Rob. No, we already have our production line established in our Danbury facility for it. All of the beta units are currently being built under manufacturing control, so that in terms of any kind of capital build-out or infrastructure build-out, it's not necessary for the product. We -- both from a detector perspective and a gantry perspective, the lines of manufacturing have already been established. It is, in fact, the same people that have been building the current products, and it is the same test equipment that has been used on the current products.

Okay, that's what I -- I just wanted to check. And then just a little bit of a bigger-picture question for you, Jack, and perhaps a little bit more open-ended.

So with essentially over six months of the acquisition behind you now, it sounds as if the integration is going well. You're obviously making changes where you need to. But as you've looked at the businesses, are there areas where there may have been some element of under-investment in the past? And could you speak to where those opportunities might be, where you could see a little bit more excitement if you were able to put some more resources there?

Well, that's a very good question. I would say that the -- we are focusing, clearly, on R&D. We see product lines in -- as an example, the MammoSite line, that we have added additional resources in R&D there. We're clearly doing it in the NovaSure side. We've done it -- NovaSure Adiana, all as one, and in the diagnostics area, we're adding resources.

So when I look at what's in the hiring queue today, the slots that we're trying to fill today are all R&D engineering slots. And it's because the fact is that, one, in a diagnostic area, we realize that the international market, which there's a real growth opportunity, the imager for that market is going to be different and at a different price point than the one today. The system that we use to prepare the files is different and has to be at a different price point than the ones we have today, so we're working very hard on getting new systems to launch internationally that also can be used in small clinics here in the United States.

On the GYN side, NovaSure II, or [Super Nova], if you will, is a product that we just had a meeting with yesterday, where we're going over with one or two variations of a theme on those products, which will make the product, let's say, an easier procedure on the woman, more tactile easy use for the doctor, continuing to build in the reliability and safety that they would expect from a product like this, and also to hopefully expand the use of that product.

On the MammoSite side, we are heavily into the R&D on MammoSite II, looking at different ways to handle lesions in different places within the breast. We're looking at expanded and alternate indications for the way to treat it with partial and accelerated breast radiation. So the area of focus is R&D, new products, and that's the area that we think we can make the greatest impact with by throwing resources against it.

Does that help?

We'll move on to our next question now coming from Mr. Isaac Ro with Leerink Swann.

Hi, guys. Thanks for taking the question. Just on Selenia, as we move towards Tomosynthesis, it's obviously in the news and people are becoming more aware of sort of the potential for it. What do you think you guys are doing or need to do more of to ensure that your customers today don't really delay purchase of Selenia as they wait for the new box?

It's a great question and one that we're preoccupied with every day. I think the most deciding factor in the customer's mind is one of price. It's -- from a broad-scale perspective, it's not a proven technology. It's sold at a premium or would be sold at a premium, so that for the day-to-day working breast center, what they're looking for is a profitable product that runs reliably, has great workflow, and that they can rely on.

As a result of that, I think that they would still be the likely candidates to buy digital mammography or Selenia. I think the university settings and academic settings that are interested in more research experiments -- experimentation and advanced indications and applications, they probably will be the first market for our Selenia product -- or our Tomosynthesis product, excuse me.

Okay. So would it be fair to say that you're not really seeing much resistance to purchasing in the traditional hospital channel today as people learn about Tomo?

I think that if we were to aggressively promote it, I think there would be a different factor. We have some level of control over that, but as I said, we are of the opinion, and I think we see it on a day-to-day basis, that those customers that have not even bought a digital yet are certainly not about to move to a product that sells at a premium over current digital mammography. They are the likely targets for the next two to three years on digital mammography, and those that have already converted to digital, those early adopters, are the most likely opportunity for Tomosynthesis.

Okay, great. And then just on competitive technologies, we had heard some rumblings during the quarter about CR being -- having gained a lot of traction this year, various market data points kind of suggesting that. Have you seen that in the channel at all? And what can you tell us, if you haven't already in the call -- I might've missed it -- about your market share in the U.S. in the quarter? Is it creeping up past 55%, or could you comment on that?

Yes. Well, to answer the question about CR, certainly, we run into the CR Fuji products from time to time. We have not seen that as being a compelling competitive factor in the marketplace. I think there is a subset of customers that probably view that as a bridging technology or an interim technology.

But, again, I think the market share numbers would indicate otherwise relative to -- simply, our market share continues to grow, and we are taking market share away from some of the [instream incumbents], like a GE, and I think Siemens and Fuji are left with struggling for whatever remains of that 10% of the available market.

So, no, I mean I think we see our share growing, and in addition, I think we see that there is much wider adoption of Selenia, and we've offered up multiple configurations of Selenia to be able to allow us to compete at different levels. We have a Selenia [S] for screening. We have a refurb'd Selenia that we use for highly competitive situations. And, obviously, we have mid to upper-tier Selenias for those that are looking for advanced workflow and connectivity benefits.

You know, Rob, I would add that in fairness to Fuji, they -- internationally is where they have certainly made an impact, and Japan is their single-largest market, which I think you would expect. They also did well in France that had reimbursement that benefited someone who already had a CR radiography product that could move into a CR mammography. So they did well initially in France. And there are certain areas -- any area that you'd found in countries that was highly CR, they have done well.

In the -- most of our competition is still with General Electric and Siemens overseas because customers are looking for, clearly, a different higher-end product that has the ability to do Tomosynthesis.

And my hat's off to Fuji. I think it is a -- kind of a placeholder, if you will, especially in the United States if someone buys it because they will then eventually migrate to a full-scale digital mammography that has the ability to do Tomosynthesis and other studies, which, of course, the CR does not.

We'll take our next question coming from Jonathan Block with Sun Trust.

Hey, guys. Good morning. Maybe just two quick questions.

First one, just international Selenia seemed very strong; I believe 99 and strongest to date. So maybe if you can just touch on what you're seeing with digital adoption OUS. Is it widespread across the board, or are there specific markets where you think you're gaining strength?

There is no universal international market. What is happening, and it's to our benefit, is that there are selective pockets of growth, and they are primarily driven by changes in reimbursement policies, budgets being allocated to public sector medicine within different countries.

The U.K. is a great example of a couple hundred million dollars being allocated to the conversion of digital mammography this year, while we're poised to take a significant share of that and hope to benefit by that as we have in the Netherlands, as we have in Germany, and so on and so forth.

So when we look at the market, because Selenia has been defined as best in breed and we have improved our presence and our marketing support internationally, we are now garnering larger shares in these growth markets, and that's what we're seeing in terms of the higher numbers that you folks are now seeing in our financial results.

We think that the growth in international is really just beginning. If we look at growth drivers for the next two to three years, international will be a big factor in that for 2D mammography, 2D digital mammography, letting alone Tomosynthesis for the moment.

Okay, great. And just one other one. I think, Jack, maybe bigger picture, post the merger, you talked to some of the synergies having to deal with distribution and strengthening that OUS. I guess here we are roughly six months later. Where does that stand, and are there specific markets where you were weak and Cytyc was strong and vice-versa where you've already made that change?

Well, we have -- I don't think where one was weaker, one was strong. What we've done is we're taking advantage of some of our strength. I mean, as an example, in the U.K., we have a major presence there with our office that was selling the Cytyc products. We have now taken some individuals that have worked out of that office, and they are moving over to support our distributors so we can get closer to the distributors, work more with them on selling the imaging products and the bone density products.

In addition, because we have our office in Belgium, and Brussels is where the Imaging division has had its European headquarters, we're using that facility, and we've added some people that have been on the diagnostic side, and they are now going to come over and be selling the interventional breast products throughout the Benelux and other areas.

So we're taking those core cities, and we're taking people from those divisions and putting them in other divisions selling other products.

We have -- we are combining forces in Australia, doing that between our two groups.

In Asia, we have already merged our Hong Kong people. Both Cytyc and [ourselves](sic) had offices in Hong Kong. We're going to be moving to a larger facility in '09, where we'll be servicing and having training for our Asian customers. And, as I said, we have opened up an office in Beijing that initially was set up to service the customer -- the distributor that was selling pap tests, but now that is going to be expanded, where we're going to be helping our distributors that sell all products in Mainland China.

So we're utilizing the best of all worlds when it comes to this, and the same thing is happening, by the way, now in the Middle East, where we have a presence in India, and those folks are going to help manage that business for India and also for the Middle East.

We've done the same thing in Latin America, where we've combined resources.

So it's going very well, and internationally, we're very pleased with what's happened so far, and we'll continue down that road.

Okay, great. Thanks, gentlemen.

Thank you.

And our next question comes from [Rob Hallasy] with [Dot Blackrock].

Hi. Good morning. Could you just talk a little bit about the NovaSure, the office channel, what percentage of the business that might represent now? And are you looking to change the agreements that you have with the office-based doctors going forward, or are you just making -- looking to make it a bigger percentage?

Actually, all of the above. Historically -- I mean I think Pat maybe can give a historical perspective of that. Pat, do you want to talk about --

I think historically we had started out about -- only about 8% of the business -- the NovaSure business was done in the office. And I think if you looked at the -- probably at the end of the last calendar year, we were probably running close to 20%, which was kind of the overall goal because I think there's -- as we had learned, the procedures in the office -- the doctors that do the procedures in the office will do more of their procedures over time than if they have somewhat of a hassle of going to the hospital and getting gowned up, etcetera. So the strategy was always to go to the office and to really focus on that opportunity.

And what we're offering the doctors is instead of going in and having an initial stocking agreement with them, what we're doing is providing really a whole package of benefits to them by having a longer-term commitment where there is more hands-on training, more peer-to-peer training. We're working closer with them in getting their office staff comfortable with the procedure and being able to discuss it intelligently, providing material for their patients, and providing even the opportunity through greater utilization to have some economic benefits to that. So it is trying to sell more in the office, having more procedures done in the office, and certainly to more physicians.

Move on to our next question coming from Eric Lo with Merrill Lynch.

Thanks for taking a follow-up. A quick question on the Selenia side. Have you seen any impact on the credit crunch or hospital cash flow concerns in terms of pushing out orders or canceling orders?

No, we have not. I think it's a -- I know there's been a lot of concerns and a lot of press that has introduced the idea that the market is coming to a halt because of some credit issues. I think we're in a bit of a different market.

We're selling a product that is a lower price point than some of the "big iron," if you will, of MRs and CTs. And, furthermore, we're also in a market that, as a demand, is being forced to convert so that our customers are at a point where they have delayed an inevitable conversion to a new technology that has become the standard of care. So that as a result of that, there is not as much discretion in the choice of moving to digital. You need to move to digital today, or you will lose revenues from women seeking mammography services from those that have that technology. So we have not seen a delay as a result of financing, nor have we seen budget dollars being allocated to other -- while other modalities are being deferred.

The interesting thing is, Eric, as we saw the softness on the surgery side, there has been none on the mammography side at all. And I think it's more investment. And I've seen some analyst reports where some of you folks have gone out and done independent studies on CapEx purchases, and clearly, the message coming back is certainly the MR CT, PET CT has been affected by it. I mean it's been in all of, I think, some of GE's reports or Philips' reports and Siemens', but it is not on this side because hospitals are investing today in women's health facilities. They understand that the women drive the healthcare decisions. So we're becoming the beneficiary of that, and when you look at our growth quarter over quarter, we're feeling damn good about this Selenia business and the continued opportunity there going forward.

We'll move on now to our next question coming from Mr. Bruce Jackson with RBC Capital Market.

Good morning. I was hoping we could find out what percent of ThinPrep slides were imaged during the quarter.

Oh, I would say probably 55, 60%.

Okay. And then you talked about the international growth for the -- for Selenia. Could -- you talked a little bit about the international growth for the ThinPrep products. What countries are you seeing that growth in, and what's driving the growth in those countries?

It's really much like what Rob has said. It's in a country-by-country basis, but certainly, the U.K. is a large market. The Australian market is. France and Germany are starting to grow. But it is kind of a market-by-market at a time.

I think, again, I will defer to Pat as he's watched this over the last 10 years roll out.

12, I think, Jack, but then who's counting? I think when you look at the international opportunity, Jack's right; U.K. is the principal driver of the European growth, and we think we're about 10 -- a little more than 10% converted. Italy and France, as well as Germany, are great market opportunities for us, and we continue to see growth there. We're still waiting for the French reimbursement that we hope will come sometime soon. Australia is a great opportunity, particularly when you look at the imaging device that we have before the government with increased reimbursement. And the China market is actually one that, working with our distributor there, we've continued to show strong growth in that market opportunity, as well. So I think there are good opportunities across the world, but it is on a market-by-market basis.

Okay. And then just one more follow-up question on NovaSure, just to make sure I understand this properly. You'd said that there were fewer people getting procedures done, and then were there also fewer placements of consoles?

Well, yes. Also, let me say it this way. The console placement -- because as I look back historically at some of the calls, that was always talked about -- that is not the driving issue. The driving issue is how many procedures per console, so we've really changed the focus of -- placing consoles means you've got a new doctor or you've put a second one in at a facility, instead of saying, "Let's look at the top 30 accounts today that have consoles, and let's drive utilization." And we're spending much, much, much more time at existing accounts with consoles to have them do increased procedures, and that is more a peer-to-peer training, education, utilization, etcetera. It is not placing more consoles.

And we'll move on to our next question coming from Josh Jennings with Jefferies and Company.

Hi. Good morning. This is Josh in for Peter Bye. I just have one quick question. It looks like -- and a short-term question -- your third quarter revenue guidance suggests that sequential sales growth in the Breast Health division will account for most of the $4 million sequential increase in revenues from Q2 and that the diagnostic and surgical segments will potentially be flat sequentially.

Just a two-part question. What is -- is this out of conservatism, this potential flat growth? And where do you see any potential upside coming from in terms of your guidance for Q3?

Hey, Josh. This is Glenn. I mean there are a lot of moving parts, and we do have a lot of product lines, so all we meant to do was try to summarize the larger product lines that we're seeing changes in. And, clearly, it really evolves around the Breast Health group. So I tried to identify within Breast Health the bigger of the drivers.

I think you're correct that ThinPrep and the NovaSure, there will be some changes. NovaSure, as Jack indicated, is expected to go down actually in Q3. So I think the ThinPrep, we're expecting to go up a little bit. But these are -- there are a lot of moving parts. I don't think they're very material, those changes, so we just tried to focus on the big pieces.

Great. And just a quick question on Tomo and Tomo-capable units. Is the plan still to ship Tomo-ready units after PMA approval?

What we will do is for those customers that are interested in having a foundation product or platform that is -- can be Tomo upgraded or software upgraded, then, yes. But that 2D product will sell at a premium over the current Selenia, so it will become another economic discussion as to whether or not they're willing to pay the premium for the 2D Tomo-ready product, or is it -- are they looking for a workhorse product to maintain their imaging workflow and all of those other aspects of running the business of tomography.

All right, great. Thanks a lot.

Sure.

And we'll move on now to our next caller, Amit Hazan, again, with Oppenheimer.

Hi. Just a follow-up, and I'm sorry to keep beating this up, but we talked about a few things with regard to NovaSure weakness. You talked about it moving to the office. You talked about perhaps some economic issues. And we know there's some seasonality generally in the March quarter.

Right.

I'm just trying to get you maybe to help us because there's still a lot of confusion out there, I feel, in terms of what is really causing this slowdown. I mean if it were the movement to the office setting, what are the doctors doing? Are they just not doing the procedure because they're waiting to get it done in the office? I would think that they're still going to do that in the hospital setting. So is it really the economic issues that are the main ones that are driving that slowdown?

Well, I mean I think it's the softness in the market. I mean, clearly, a contributing factor is that we're not calling on the hospitals as aggressively as before and detailing them. You're going to sell less. But I don't want to kind of put it off to that. I mean we clearly saw a slowdown in procedures in the hospitals. Whether this is a byproduct of the economy or not, I don't know. We know it's not lost market share. Do we believe it's saturation? We don't believe it's that. But, certainly, it had a major impact on the -- on Q2 as far as we're concerned, and in Q3.

We do know that when the doctor goes -- does a procedure in the hospital, they get like $300. And when they go to their office, they get $1,000. Now, would some delay? The answer is yes, they would delay, but they're not going to do it at the expense of a patient.

So I would say we chalk it up to softness, first, based on fewer procedures being done, and secondly, because we have clearly made this transition to -- and our reimbursing, incentivizing our sales people to sell in the office space, which has certainly taken their focus off the hospital market.

I don't think -- we think it is clearly the long-term strategy. We're not seeing our products replaced by competitors, but it's a softness that we're monitoring carefully, but we're also picking up backlog. And as I said, at the end of this quarter, we could have a considerable amount of backlog. We did a fair amount in the first -- in this past quarter, and we're tracking a similar number, if not more -- actually more in this coming quarter.

And just to follow up, one question on that, if you can paint a picture for us in terms of how many physicians are now, roughly speaking, performing NovaSure in the office, and, generally, how many physicians out there are performing NovaSure, whether it's in the office or in the hospitals, just so we can kind of get --

I'm going to go back to Pat on that because he has certainly more knowledge of the number that are trained versus the number that are doing it.

Well, I think that as we have seen over time, that once the doctors get trained and are comfortable using it in the hospital setting, that it's easier for them to migrate into the office space setting. I don't think the number of physicians is the rate-limiting factor here. I think, as Jack has mentioned, it's fundamental that I think we have to drive patient demand and the conversion from what is the doctor's normal course today, which is to provide hormone therapy. We have to change that treatment pathway, and that's been a long-established medical treatment pathway that physicians have used, and I think the challenge that we are seeing is fundamentally that, that we have to work with the doctors in their offices and with their office staff to get more patients to consider NovaSure first, as opposed to one or two unsuccessful treatments of hormone therapy.

We'll take our next question coming from [Valerie Braun] with AllianceBernstein.

Hi. Thank you for taking my question. I just wanted to go back a bit to the digital mammo market, and I understand that iCAD finally got approval for its CAD system to be used with this Fuji CR. I know it's only happened a month ago, but I wanted to better understand what you're seeing in terms of perhaps some of your more price-sensitive customers and their response to having the CAD available to work with Fuji.

We have not seen a meaningful change in terms of the competitive dynamics as a result of Fuji now having approved iCAD. I think that some customers have been waiting. Some customers have found in the past that they were really using a workaround with an analog CAD substitute. So I'm not certain this will have a significant change within the competitive dynamics, but nonetheless, at least as of today, we're certainly not seeing that as a compelling difference.

Thanks.

Okay.

We'll move on now to our next caller, Matthew Scalo with Canaccord Adams.

Hi, guys. I just wanted to ask a couple quick questions. As you move to kind of this annuity model for NovaSure, have you seen kind of a higher-than-normal turnover rate in that surgical rep sales force?

No.

(Inaudible) that this has just been implemented.

No, we have not.

Okay. And then as far as timeline --

And the reason is is because any kind of reps saying, "How's it going to affect me financially?" it's not going to affect them financially, and we're going to build in incentives, quite frankly, so that they can benefit from it.

Right. That was the question.

Obviously, and that's obvious, yes.

Okay. And then as far as on Selenia, the time from purchase order to shipment, has that shrunk dramatically, meaning for backlog? By year-end, should we see it flattish, gross, year-over-year by, say, 10 to 15%? How should we look at backlog?

I think that where we stand today is we're trying to manage a (inaudible - technical difficulty)-day lead-time. We want to get that down to probably a 60-day lead-time. There is a lot more pressure on the parts of customers today that if they've made a decision to convert, they want those quickly.

Now, the only exception to that is those customers that already ordering multiple systems. They will still string those out over a series of weeks or months, but for the most part, there is a compression in lead-times that is really by customer demand, and as we have said before, we have always tried to meet deliveries to whatever our customers' expectations are.

As far as OUS and Selenia, should we expect that to be over 400 units by fiscal '08?

I'm not certain we're prepared to speak to that. I think the trend is positive, and we'll certainly keep you guys tuned in, but at this point, we're probably not prepared to commit to that number.

We'll go on to our next question coming from Tycho Peterson with JP Morgan.

Thanks for taking the follow-up. Jack, you mentioned that you'll have a Selenia down at ACOG next week. Can you just talk a little bit about how you're viewing that opportunity, and then just, in general, about to the extent to which you're decoupling the camera from the image processing?

That's fine. I think, Tycho, and I'll see you there, obviously -- I think I'll let Rob answer that because he's probably -- he's a better decoupler than I am.

Yes, as far as the ACOG presence, Tycho, that's really a follow-on to the discussions that we've had in the past relative to our distributed mammography, telemammography strategy, and that is to place gantries, meaning the imaging device acquires the mammogram at remote sites irrespective of where they are -- a gynecologist's office, a low-volume mammography center that doesn't have reading radiologists or otherwise -- and having those images then transmitted to a central reading facility that is their radiology or imaging center partner.

This is a further step in that direction of a distributed mammography model with the intent to bring what is world-class technology to a remote area that would not normally have a high-volume reading radiologist and having that patient provided with the comfort of knowing that there is a reading center that is a high-volume center with very experienced mammographers and breast imagers.

So I -- the decoupling aspect is simply putting a gantry, no workstation, at a remote facility, and as I said, it's irrespective of whether that's a gynecologist or not, and the workstation technology that we talked about earlier being in the central reading facility.

And we'll take our final question coming from Eric Lo from Merrill Lynch.

Thanks for taking the follow-up here. I just want to better understand the NovaSure guidance for next year. You're talking about high single-digit growth, and the numbers are pretty soft for fiscal '08, so why aren't we going to see a recovery in the NovaSure sales of next year?

Well, you're going to see a recovery in Q4, but Eric, I think that to promise the double-digit at this point, I think, would be premature. We're being as honest as we can in assessing this situation today. I mean, clearly, what's driving the stock today is the market reached its zenith, and we don't believe it has. We believe it needs to be repositioned. We think there is still a -- when you look at the 1.4 million -- and the reason I keep coming back to it is the market dynamics have not changed as far as the number of women out there that are being treated for menorrhagia. And it's -- 2.5 million are being treated, but 1.4 just on hormonal therapy. So the market is still there. There's nothing changed in that regard.

What has changed is we hit a wall where the number of procedures went down. It's affected us today. I mean the stock is obviously down because of that, because you're all saying, "Is it going to drop further?" We've said, yes, we expect it's going to drop in the current quarter that we're in, and then it's going to pick up again because as this backlog continues to build, we -- our goal is to certainly have at a 50+ million a quarter running rate 30% of it coming out of an existing backlog that for all -- with an AUP, that will improve.

If I said today, which would be nice to hear, we're going to get 20% next year, we're going to get 30%, I can't tell you that. We don't know that, and it would be optimistic thinking and would be leading you guys the wrong way. I look at it more of -- here you have a quarter. We're up about 23% after adjusted. We're up 30% in Breast Health; 12% in Diagnostics; 10% in Skeletal Health; and GYN Surgical was flat.

Overall, GYN Surgical brought us down, but we had -- as a Company, hitting almost 25% isn't bad. We still expect -- because as Selenia is continuing to grow, as Diagnostics is growing internationally, as Surgical is going to grow internationally because there was just reimbursement in France that was just announced last week, as Skeletal Health has kind of stabilized -- we still expect very good growth from this Company, and we're not going to live or die by what happens on the GYN Surgical side, but we are putting a lot of resources against it.

We've thought this out, and we know we've got the right approach. It is going to take time to get there, and I'm not going to tell the Street something that we really are unsure of at this point.

At the end of this quarter, we're going to be in a much better position to look at Q4 and next year, and at the end of Q4, we're going to do that again. But we will be as transparent as we can in telling you what's going on with the market, how it's impacting us, and where we expect it to go from here, wherever that is.

Have you guys added this, you know, spend outside the U.S. (inaudible) drive NovaSure sales as in [booked] sales?

Yes, the answer is yes we have. We are adding sales people. That is correct.

How many have you added, and how long would that continue for?

We'll be adding -- we'll continue over the course of the next -- the next 12 months, and the number of heads -- I don't know. Rob, is it a -- counting Australia --

I'm on, Jack. Yes, right now, we've added roughly 12 people. We'll continue to do that over the course of next year. So there's the heightened emphasis on securing that growth in international, as (inaudible) suggested.

That's it for me. Thank you.

All right, Eric. I'll see you at the show.

And there are no further questions.

Well, I'd like to thank everybody. We took an extended period of time, but obviously, there were a lot of questions today. And I'm sure that you'll have plenty of opportunity to talk to Glenn. I'd get in the queue calling him in his office.

I will be at ACOG. I am happy to meet with anybody and everybody to discuss where we are. We think that the story is still a very rich story, a story of growth, and we're going to -- we've addressed the issues that are before us, and we're -- they're going to be met with the same focus, the same determination, the same intensity that we've always faced everything else. We've had 17 quarters in a row of consecutive growth. We're looking for 18.

With that, I wish everybody a very safe and happy couple months, and we will talk to you at the end of our next fiscal quarter. Thank you again.

That does conclude this program. We appreciate your participation, and have a wonderful day.