Hologic Inc (HOLX) 2008 Q3 法說會逐字稿

Welcome to the Hologic, Incorporated Q3 Fiscal Year 2008 Earnings Results Conference call. Today's conference is being recorded. Before we begin, management of Hologic, Incorporated has asked that the following statement be read.

Certain statements made by management of Hologic, Incorporated during the course of this conference 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 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 express disclaim any obligation to -- 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 introduction, I would like to turn the conference over to Glenn Muir. Please, go ahead, sir.

Well, Wendy, Glenn is going to go second and this is Jack Cumming. So let me welcome everybody here today. Thank you for attending our third quarter fiscal of 2008 conference call. And joining me on the call this morning is Rob Cascella, our President and COO; Howard Duran, our President in the Diagnostics group; and Glenn Muir, our Chief Financial Officer.

Before proceeding, I want to remind everybody the Safe Harbor Statement accompanying our press release, and that applies to comments made during this call. We are very pleased to share with you our fiscal third quarter financial results for the period ending June 28, 2008. And as is my usual custom, I'll briefly touch on the highlights and then let Glenn provide you with further details on our operational progress, give you some guidance for the remainder of fiscal '08 and then of course we will open it up for questions. Let's start with quarterly performance.

This has been the third quarter, our 18th consecutive quarter where Hologic achieved record earnings, posting $85 million in non-GAAP adjusted net income. That represents a 209% increase compared to our non-GAAP adjusted net income of $27 million in the third quarter of fiscal '07.

And on a GAAP basis, we reported net income of $61 million or $0.24 per diluted share, which included one time non-returning and other charges, which Glenn is going to go into detail.

Consistency breeds success and as stated, 18 consecutive quarters of earnings growth is no small task. Our focus on judiciously managing costs and improving operating efficiencies continues to pay off, obviously by our performance.

As stated in our press release, fiscal '08 third quarter revenues totaled $429 million, which represented 124% increase over the third quarter of fiscal '07 and the increase was primarily due to the contribution of the diagnostics and GYN and surgical business acquired from Cytyc last year. The company's backlog for orders of Selenia was 501 systems with the digital systems in total, and a total backlog for all products of $378 million.

We experienced two major hits in sales this quarter. First, our primary detector customer accelerated their migration to another supplier as we phase out of selling to third parties. We will plan on a continued decline from third party sales over the remaining course of the contract, which expires in July of next year.

Secondly, Selenia revenue for the quarter was less than our initial expectations, and not because of unit sales, as we set a record for the number sold. It was primarily due to the configurations of Selenias installed in the quarter. As indicated last quarter, when we experienced the opposite effect, there was a lower concentration of our digital mammography workstations and communication managers included with each Selenia sale in the quarter.

We believe this is largely due to a couple of key factors. One, a disproportionably higher volume of sales not requiring our propriety workstations, since customers are simply purchasing additional Selenia gantries to add to their existing systems.

And number two, a higher mix of the featured domestic Selenias installed in the quarter to sites that perform screening mammography's only as customers expand to broader spokes of their distributed mammography systems. These configuration changes occurred in mid-quarter and had the effect of reducing incremental revenue per system, which would appear as a lower mathematically calculated ASP.

With the exception of Q2, the configuration of systems realized in Q3 is more in line with previous quarters. Therefore, we believe we will be returning to a more normalized mix over the next few quarters, which of course Rob will be happy to talk about during the Q&A.

As an additional point of information, in Q3 we had our largest order booking quarter ever. Normalizing for Q4 '07 when we had a 40-system domestic order from one customer. Additionally, we could have clipped that number in Q4. International orders were again extremely strong. Showing the second highest order volume in our history.

On the competitive front, we recently received from NEMA an analysis of quarterly mammography orders recorded for all manufacturers in the U.S. Selenia orders represented slightly over 60% of total digital mammography orders.

Overall, breast health revenues were $219.5 million for the third quarter, which represents a 32% increase over the $166.3 million for the same period in fiscal '07.

On the GYN surgical front, we're very pleased with the results of the group as sales of NovaSure exceeded expectations with revenues of $56.3 million in our fiscal third quarter versus $55.2 million in our fiscal second quarter. As you may remember from last quarter's call, we acknowledge slowing in NovaSure growth in the U.S., which resulted in an overhang of inventory.

We gave guidance at our Q2 to Q3 NovaSure revenue would be down and flat for the full fiscal year as we continue to implement a shift in the selling strategy, including continuing to move more of our customers to standing orders to normalize the order patterns, and to manage inventory better; continuing those who focus on driving underlying procedure growth by convincing physicians to use NovaSure sooner as a superior therapeutic alternative when women with heavy bleeding fail on hormonal therapy; and continuing to drive the use of NovaSure in the physician office where we believe there is additional growth.

And some of the metrics worth noting for the quarter are that 78 of the hospitals and the ambulatory surgical centers decreased inventory over the course of this quarter. We took an inventory in July and we matched it up with the inventory we had taken at the end of Q2 and there was a 78% reduction for hospitals and ASC's.

There was a 62% decrease in inventory in the offices. Only 4% of the offices and 5% of the hospitals had inventories of greater than 1.5 months. So we're certainly getting there. We feel very good. We had a strong quarter and relative to our strategy of promoting a monthly standing order program among our customer base, the compliance is going along very well. 86% of the primary physicians are complying with the monthly standing order, but the compliance as a revenue is over 100%. So the number of offices is 86, but the number of revenues is 100% of what has been committed for.

And in the hospital business, which represents some 70% of our business, it is over 100% of the total. As a matter of fact, we were several million dollars over the contracted value. So we're extremely happy with that.

As our fiscal Q3 results give us consonance on this strategy, we believe it's working. We believe we have put NovaSure back on a firm footing with strong growth prospects. All three objectives have been met or exceeded. We've increased sales, driving both the burn off of existing inventories and new orders. We increased backlog and monthly standing orders from 16 million at the end of Q2 to 36 million at the end of Q3. We've decreased the field inventory and we've made significant progress in normalizing inventory levels in our customers and we expect the majority of counts will be a par with desired inventory levels will be at par, excuse me, by the end of this quarter.

For the diagnostics group, their revenues totaled $126.6 million, which was a 5% increase over Q3 of '07.

We're very excited about the closing of the acquisition of Third Wave on July 24. We have conducted numerous onsite meetings with the Third Wave team and the integration of business systems and processes have begun.

More importantly, all hands are on deck and working toward FDA approval for the various HPV submissions. The synergies between Hologic's diagnostics research, engineering, and the manufacturing team in Marlboro, and Third Waves group in Madison, will help drive current, as well as future product developments.

Sales training of the Hologic laboratory sales team is taking place beginning next week in Madison. And the Third Wave sales team will be integrated into our Hologic laboratory sales group, combining to make a team of approximately 50 people moving forward.

The training of our entire physician office sales team will take place at our national sales meeting in the fall. That will add another 90 sales professionals to promote the Third Wave products in strength of the combined product offerings from the expanded diagnostics group.

The HPV launch plan is being refined. Sales collateral and material is being developed to maximize our opportunity upon FDA approval in the United States. It is our plan, however, to launch our HPV products internationally during Q1 of FY-09. The HPV psychology combination is very exciting and we believe it will be a growth driver as we leverage the two technologies to gain a competitive advantage in the marketplace.

There are currently 10 million HPV tests being performed in the U.S. representing a $200 million market and growth in excess of 40% in each of the past five years. Hologic believes the global market for HPV testing will increase to 800 million in the next few years.

I'd also like to give you an update on tomosynthesis. We mentioned in our press release that we received a letter yesterday from the FDA. The FDA's request for additional information in connection with our P&A application for tomosynthesis is appropriate, and it's appropriate given the fact that we are the only company to have filed for approval of this breakthrough technology. I can tell you we're obviously highly disappointed that we received the letter at this late time as 180 days has expired, but I would also add that the FDA is under tremendous pressure as they're understaffed. They don't have the resources and personnel to be able to adequately, I think, react to the number of filings that are in there.

We are very confident that we can respond in a short period of time to their questions as our database of information has grown substantially since our initial submission. The types of questions they have asked, basically, are questions relative to taking the data that we have submitted to them and clarifying it basically, from a different perspective. They have formats and different views that they would like to see our data in.

They want us to reanalyze our current numbers. They have not asked us to do any additional clinical work. They want us to take the numbers so we will work internally and, externally with our biostatisticians and we will provide them in the format that they have asked, answers to these data clarifications. Whether it be something like a DOS calculation or it would be something as simple as software development policies, which was one of their questions.

We're very confident we'll get back to them very soon. We're now expecting approval to market this product in the U.S. in the first calendar of 2009 and that's, of course, assuming that the FDA will be able to respond effectively to our response.

Our launch internationally began in Q3, if you remember, with a soft launch out at the European Congress of Radiology in March in Vienna. We clearly intend to ramp up our sales activities as we move forward, and international shipments will commence in our December quarter. As we said in our press release, we have sold ten Dimensions. We expect CE mark by the end of August, which will allow us to deliver units in the EU anytime thereafter. We're certainly also allowed to be able to sell units on a worldwide basis. Certain markets require certain filings and approvals, FDA approval in some Asian markets. We can sell, but we can't deliver those, but we feel very confident in our ability to continue to aggressively move the tomosynthesis project forward and the sales forward.

So in summary, we continue to focus on the overall strength of our operation. Our efforts clearly reflect the strong fundamentals of our business, including our competitive position in the market place, and the momentum of our product offerings and our ability to execute.

We remain extremely optimistic about our opportunities and we believe we're well positioned to realize the full potential of it. Our expectation is to close fiscal '08 with a strong finish, providing the momentum necessary to drive continued growth in '09. And next year represents several exciting advancements for us. The commercialization of tomosynthesis, Adiana and Third Wave.

In addition, we have regained confidence in our positioning of NovaSure and believe the addition of Third Wave will infuse new life to our diagnostic franchise. And finally, international will achieve ongoing growth for the company as we reap the benefits of continued success of existing products and the opportunities afforded to us by our new technologies. And we look forward to sharing our fiscal '09 guidance with you on next quarter's call.

With that, I would like to turn the call over to Glenn, Glenn?

Thanks Jack. I'd like to 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.

Third quarter earnings adjusted for acquisition costs increased again to a record high, and was a bit higher than our guidance in our last earnings call. Even though revenues were down slightly from last quarter, Q2, they were up 13% year-over-year on a pro forma basis including Cytyc.

Our number one sales driver continues to be sales of Selenia, and this quarter we sold a record 429 digital mammography systems. Domestically we shipped 348 Selenias, and internationally we shipped 81. Total Selenia revenues this quarter were just over $118 million.

Our challenge this quarter was Q2, the March quarter, which benefited from an unusual increase in secure view workstations and a favorable product mix, which was not repeatable. Q2 also included a one quarter surge in MultiCare table sales as we sold 116 tables last quarter compared to the more normal 88 systems we sold this quarter. This alone was a $3 million difference. Digital detectors sold to an OEM were expected to be down, but not quite the $3.5 million drop we ended up with this quarter as we only sold 30.

Included in our GAAP results, our two acquisition related charges that total $37 million for the amortization of intangible assets and the restructuring related to our acquisitions. Absent, these acquisition related charges, our pre-taxed earnings this quarter would be 131.9 million, and using our effective tax rate of $35.6%, net income would be $84.9 million or $0.33 per share.

Our consolidated gross margins adjusted for the acquisition related charges were 62.7% just over the 62% we were expecting. Our operating expenses, again absent the acquisition related charges, were $124.5 million. A decrease to 29% of revenues and slightly below Q2's actual and below our guidance.

The improvement in gross margins and decrease in operating expenses is directly related to our efforts in streamlining our businesses and leveraging our combined resources. This combination of higher gross margin dollars and lower operating expenses are what contributed to the better than expected bottom line result. As a reminder, our guidance was for non-GAAP adjusted pre-tax income of $120 million and EPS of $0.29.

Turning to the balance sheet, the $90 million term loan that existed at the end of March was completely paid off this quarter. Approximately two years ahead of our initial goal.

On July 17, in connection with the acquisition of Third Wave, we borrowed $540 million, consisting of a senior secure Tranche A term loan in the amount of $400 million at an interest rate of LIBOR plus 2.5% and a Tranche B in the amount of $140 million at an interest rate of LIBOR plus 3.25%. We expect to pay this new term loan off over the next two and a half years.

I would now like to switch to our guidance for the remainder of fiscal '08. For the fourth quarter of this year, which ends in September, we are expecting revenues to increase to $438 to $439 million. Approximately $10 million higher than this quarter from the inclusion of the recently acquired Third Wave results from which we are expecting a $6 million contribution, and also a slight increase in each of our four reporting segments. The number of Selenias sold is expected to increase to 434 systems, which would result in a total of 1,665 sold this fiscal year versus 1,189 last year and up from our guidance last quarter of 1,655. This would bring total fiscal 2008 revenues to approximately $1.67 billion.

Consolidated gross margins are expected to hold at the 62% level. On a comparative basis, excluding Third Wave, operating expenses are expected to be approximately $126 to $127 million or 29% of revenue. This excludes the amortization of intangibles of approximately $7 million and is $2 million higher than Q3.

Third Wave's operating expenses are expected to be approximately $9 to $10 million, bringing our total operating expenses to between $135 and $137 million. This guidance is absent the effect of merger or acquisition related charges, such as in process R&D and the amortization of intangibles. With the new term loan of $540 million for the acquisition of Third Wave, our interest expense is expected to increase to approximately $19 million.

Bottom line, we are expecting Non-GAAP EPS, excluding the amortization of intangibles, of $0.30 per diluted share. This includes the results of Third Wave, which are diluted to adjusted EPS by about $0.03.

Next, our outlook for fiscal 2008, which ends in September. We are looking for total consolidated revenues of $1.67 billion in our four reporting segments. In breast health, we are forecasting approximately $860 million in revenue, representing approximately 28% growth over fiscal 2007. This is primarily attributable to an increase in Selenias. We are now projecting a year-over-year increase of 476 Selenias to 1,665. This is also an increase of 10 Selenias from last quarter's guidance.

In diagnostics, we are forecasting $486 million in revenue, representing approximately 14% growth over fiscal 2007, due to an increase in international ThinPrep sales, worldwide growth in imager revenue, full term adoption, and now the inclusion of Third Wave.

In GYN surgical, we are forecasting $218 million in revenue, flat with fiscal 2007 as we reposition this product in the primary care channel and continue our overseas expansion. And in skeletal health, we are forecasting $106 million in revenue.

For gross margins, we are looking for combined gross margins of approximately 62% on an adjusted non-GAAP reporting basis. And for operating expenses, including Third Wave, they are expected to be $500 to $510 million for the year, and also exclude the amortization of intangibles, which are expected to be $27 million, which would bring us in at approximately 30% of sales.

This is $15 million less than expected last quarter as we continue to streamline the businesses. Included above are approximately $25 million of FAS 123R stocks compensation charges. We have not backed them out of our guidance, but will indicate what they are quarterly and disclose them in the press release as we currently do.

Interest expense is expected to increase to $84 million for the year, just slightly higher than last quarter's guidance of $80 million due to adding the $540 million in term loans used to fund the Third Wave acquisition, offset in part by a more rapid pay down of our original term loan that was paid off in June.

Our effective tax rate for the year is expected to be 35.6% and we are expecting the shares outstanding to increase only slightly above our current 259 million in Q4. This should result in a weighted average number outstanding of 251 million shares for the year.

Based on all the above, we expect non-GAAP adjusted pretax income to increase to $460 to $462 million and our EPS guidance for FY '08 on an adjusted basis with 251 million shares outstanding, would be a $1.18 per diluted share. This includes the dilutive affect of Third Wave, and even still is at the high end of our previous guidance of $1.15 to $1.18 per diluted share. This is absent the affect of merger related charges such as in-process R&D and amortization of intangibles.

And with that, let me now return the call back to Jack.

Thank you very much, Glenn. Let me try to sum up pretty quickly here, and that is that for Q3, overall the revenues were not up to our expectations and we felt that because of the mix of our peripherals, etc., we certainly took a hit on the revenue side and we expect that it'll be more normalized over the next few quarters.

On the very positive side, we did have a record number of Selenias sold. We had a record number of Selenia orders taken. We had our gross margins improvement, we sold ten tomos, we beat our EPS prognostications. Our operating margin was up and overall we thought it was a good quarter.

We also believe that looking at Q4, we anticipate we're going to set another record of Selenia units sold. We're going to set another record for taking Selenia orders. We're going to continue to sell strongly on the tomosynthesis product overseas.

We're going to see a continued recovery from NovaSure with sequential growth in the quarter over Q3 and we see a double-digit growth in FY '09. Through -- at the end of today will be the end of -- or the end of July here. So far and at this point, we've had no pregnancies in our Adiana program on three years and we'll be filing that information to the FDA, and looking forward to receiving approval from them.

Relative to tomo, we have all the data on hand to answer the FDA's questions. We will be moving as quickly as possible and putting all of our resources against that, and intend to meet with them over the course of the next month or so based on our submission and trying to work with them to get a panel scheduled and finally get this approved.

So with that, I would now like to open the call up to questions and, Wendy, if you would take over.

Certainly, sir. The question and answer session will be conducted electronically today. (OPERATOR INSTRUCTIONS). We'll take as many questions as time permits and we'll take them in the order that you signal us. Additionally, if you're utilizing a speakerphone, please pick up your handset before pressing the corresponding digits so your signal will reach our equipment. (OPERATOR INSTRUCTIONS).

And we'll take our first question from Eric Lo with Merrill Lynch.

Morning guys. I was just hoping to touch on the FDA request a little bit. When are you -- what's the timing in terms of getting those submissions and what is your expectations of a potential FDA panel date?

Eric, the best way to think about this is that the FDA will have somewhere in the area of about 130 days to 140 days inclusive of a panel review once the additional information is resubmitted. So from our perspective and instead of what our original expectations were of a fiscal Q1 release. We're looking at fiscal Q2 release. Obviously, depending on FDA approval. But the date and the time period that the FDA has remaining is inclusive of a time to schedule and hold the panel review and that is not to exceed 100 and -- I think it's precisely 132 days.

I see. How about in Selenias. You guys mentioned that average selling prices came down in the quarter. You guys turn over much and most of the backlog within the next quarter. How much visibility do you guys have in terms of the sales per order that you guys get?

Yeah and I -- just to be clear that mathematically calculated ASP and the decline in that is virtually 100% related to the fact that in the prior quarter we had a significant number of peripheral devices and work stations included in each Selenias gantry sale. And that number of work stations and peripheral devices dropped as a percentage of total Selenias in the quarter.

So that if you look at ASP's of a gantry, they have held consistently relative to a quarter-over-quarter review for the last probably five quarters. We're not seeing the market erosion. This was caused by a configuration mix. It asks you a question about looking forward. We have about if -- as we compress our backlog to a level of a 60 day turnover or a 90 day turnover, roughly 50% of the quarter is in backlog as we enter the quarter. Even though there is more units in backlog, not all those are scheduled to ship in the quarter.

What that means is that by mid-quarter we filled out the balance of what we think our quarterly expectations are going to be so we are subjected to whatever the new orders that are much more of a book and build type that arrive during that quarter. We are subjected at that point, to whatever the configurations are, whatever the market mix is, whatever the product mix might be.

So to answer your question, about 50% of our quarter on Selenias, it's in backlog and the balance of it is to book and bill as we -- as the quarter unfolds.

Are you guys seeing a longer sale cycle for Selenias right now and also in Europe, I noticed that the number of placements came down sequentially. I'm just wondering if there has been any impact in terms of slowing economy in Europe.

No, I mean the -- it's a -- the question on the sale cycle I think that it is certainly a more diligent sale cycle on the part of our customers as we reach beyond the normal Hologic installed base. I think it still shows in our market share that we are winning with this proportionally high share within new deal closures. OUS or Europe specifically, I think we -- there was some lumpiness in terms of order timing. But we are very bullish about international and about the successes that we've seen in markets around the world.

So I don't think that it is not a linear trend by any stretch of the imagination, but the potential is there for significant growth.

Okay last question for Glenn. I noticed sequentially between fiscal Q3 and fiscal Q2, we saw about 110 basis points gross margin improvement and 170 basis point EBITDA improvement. I was just wondering what was driving that leverage considering the sales and the sales mix is relatively similar between the two quarters.

Yes, Eric, I think the big part of the streamline of the operation itself. We have much benefit from the combined resources even on the manufacturing side from a purchasing standpoint. We're making a lot of progress with the two companies so you -- that is showing up on the gross margin line as well. I think we've improved our operations in general even when we think about breast health for a moment and the synergies between the operation in Delaware and the operation in Germany, things like warranty and scrap costs have continually come down. And those are part of our overall progress that we're making and I think we'll continue to see that as we go forward as well even if the revenues weren't increasing as high of a rate as we might have thought. We'll still get benefit. We will clearly get gross margin benefit with an increase in revenues but in any case, we do believe we'll continue to get margin expansion from some of the improvements that we put in place.

Did you guys have any change in terms of the provisions for obsolescence or doubtful accounts or warranties or the like?

There was one warranty -- I'm sorry -- one product obsolescence item that was a hit in Q2 that affected the skeletal health group to the extent of $2 million. That is fully taken care of at this point.

What about provisions going forward?

No. I think we're comfortable where we are.

Okay. Great thanks guys. I'll get back in queue.

Thank you. We'll now move to our next question with Amit Hazan with Oppenheimer. Please go ahead with your question, sir.

Thanks. Hi. Good morning, guys. I wanted to, you know with your stocks down 14% or so I thought I'd ask a couple big picture questions, because I think that's what people are most concerned about. So first of all, as it relates to the fourth quarter guidance, I'm hoping you can be very specific on why you lowered that guidance. Maybe talk a little bit about the primary detector customer. How big of a sales number that is for you and then the street right is at about 14% growth for fiscal '09. I'm wondering if you can generally give us some comfort around that number or give people an idea of what you're expecting for next year.

Well I think we can do this a combination of ways. Glenn do you want to or Rob?

Well let me start a little bit on Q4. I think Q4 in last quarter guidance call really reflected a higher Q3. I mean we have to put in perspective that Q3 was $5 million shorter than we were anticipating. That did lead to what our Q4 views would be.

That being said, if we look at Q3 to Q4 and if we look at where the growth is coming from sequentially, the number one driver is the addition of about $6 million from the Third Wave. On top of that, if we look at the four reporting segments we are expecting sequential growth from the June to September quarter in each of those four segments. And just to remind everybody the summer quarter is not a particularly hot quarter from a shipping quarter for the company.

Of all the four segments, it's the breast health that we think will grow the greatest. So of the remaining $3 to $4 million in growth, the big chunk will be Selenia as we increase our Selenia by five units. That will bring us to this $438 to $439 million level and I appreciate for the year at the $1.67 billion it is a bit lower than where we though we would be before. At the last quarterly call, we identified the four segments and I know that those four segments added up to $1.685 billion. So we're about $15 million shorter from where we thought or certainly the pieces we were most comfortable with at the last conference call.

Rob, do you want to add on the phone?

No, I think that the -- when we look at Q4, I think that the order rate is expected to be substantially higher, so we feel very bullish about it. The question is, are all those customers going to be in a position to take delivery of what we think the new incoming orders will be for this fourth quarter? So I don't know if the revenue guidance tells the entire story. I think order rate will be a compelling factor for us and we feel very optimistic about the trends that we see both on the Selenia side and also for that matter on the NovaSure side for Q4.

Right, all the business, diagnostics included, are all trending up. So, I mean, we feel good about the quarter. We have certainly, with a little bit of our tail between our legs are looking at these numbers as conservatively as we can and as rationally as we can. Selenia we're certainly not backing off of the fact that Selenia remains strong. For us, if the bookings wouldn't be strong, that would give us great pause, but as I said we expect to set a record. Rob has talked about the normalizing of the peripherals, which certainly is going to help, and the fact on the detector, it accelerated, it was a couple million bucks more than we expected for the decline, which certainly didn't help us. We have factored that in now and we're going to move forward.

Okay. Just a couple follow-ups on this, because I think it's very important. Your guidance last quarter was not $1.685, it was $1.700 as per your press release, which means that you have a reduction in about $30 million or so. So with a miss in the quarter being $5 million, where is that other $25 million coming from specifically.

Well, Amit, we were -- I appreciate that last quarter our guidance was $1.7 but in fact we identified $1.685 and I don't want to split hairs, but that $15 million in upside wasn't identified. We felt very good about the business at that time and we felt strength would come through within those four segments. We're not seeing that right now. I think as we discussed on the breast health side even though the Selenia units are increasing we have to respect that some of the product configuration and mix changes is causing us to generate a slightly lower revenue level than we would have though previously.

Okay. And just another kind of big picture question, just because, again, I think this is critical. The Cytyc business just generally, if we think about the Cytyc over the last couple of years, it's grown about 20% and we look at the March quarter, it grew about 12% and we look at this quarter it grew about 1% year-over-year. Now we recognize that NovaSure is probably a good size, a good part of that, but if you guys take a step back and think about that business, think about your acquisition a year ago. What has gone wrong? I can't imagine that 1% growth is what you expected. So can you give us come color on what has gone wrong so far and hopefully some comfort with where you think growth for that business can be over the next year.

Yes, and this is Rob. I think it can really be summarized very quickly and that is that the original expectations on the NovaSure business were that they would follow the trend that had been achieved in the prior year. When we got involved in the business and realized where that business needed to be relative to continued growth, a repositioning had to take place.

Now we expected after our repositioning from last quarter that that would actually take a couple of quarters. I think we're on the right track relative to our refocusing of sales and our sales program in sales incentive, but it -- the recovery of trying to get back to the normal growth trend for that business is certainly not going to happen in a quarter. So we believe that when we look out at '09 we can resume a normal growth trend for that business, which is good solid double digit growth, but it wasn't going to recover in a 90-day period.

So at the end of the day, our expectations were that we'd have a tremendous cash flow business with our diagnostic franchise. We'd have a growth driver in NovaSure and it's now a matter of recovery mode for NovaSure with growth expectations to the future. We think that that is happening very, very near term and we think that's happening at a faster rate than we thought last quarter.

But again that was probably the expectation that even when you look at yearend projections that the thought was that the -- that NovaSure was going to be the biggest shortfall from our original expectations and it is proving to be so. And it's on a cure path right now that we think represents good solid growth for the upcoming year.

Okay. Thank you.

Thank you. And now from Morgan Stanley we have David Lewis.

Good morning. So for Rob or for Jack. I guess I'm trying to understand is boxes are not materially different, but obviously mix played a difficult role here this quarter.

When you think about your business and where you are from penetration stand but whether it's 30% or 40%, presumably more customers are going to be purchasing their second, third, and fourth box but not their box on a go-forward basis. I'm trying to understand how mixed is going to be transient. This mix issue seems sort of here to stay and more of a nature of where you are in your development sample. How am I mistaken?

Yes. And a good -- it's an excellent point. I think the difference is that we found that revenue from a mix perspective and that's configuration mix in Q3, or Q2 I should say, was extraordinary meaning that about 70% of the number of Selenias that went out or carried a work station with them. That's extraordinary if you look at our trend, which has been running somewhere between a high 50% or mid-50% to 60%.

So what happened in Q3 was that we went back to a level that was around the mid-50% range. We believe that a normalized trend is not 50 nor is it 70. It's been running, it, it should be running at around 60%. So when we look at our historical numbers of that draw of workstations we think that we're -- over the next quarter to two -- we will be back at a rate of running at around 60%.

Now I'll give you a couple of factors that obviously you're right. As existing customers buy more modalities, it changes that percentage. The other fact of the marketplace is that there are a lot of new single unit customers that will end up having to buy a workstation.

And then finally, in order to display Tomo images at some point in the future, the only display technology that will work with Tomo is our own display. So as customers buy workstations, they're looking at our proprietary workstation when also looking at our gantry for fear that when Tomo does become a product, that they already have workstation technology that is compliant with it.

So there is a lot of factors that will be playing on percentage of workstation draws for gantries but all of which lead us to believe that we'll be back to a normalized trend of around 60%.

Rob, is that a reasonable trend for fiscal '09.

Yes. Yes.

Okay. So just come back to the point that's been asked before here. If your boxes are sort of where you thought and mix is really not changed from a term perspective and breast is the disconnect, where is the disconnect coming from?

Well they -- no -- I think they, maybe we're not explaining it appropriately. The disconnect was from Q2 to Q3. We had a very high percentage of workstations. When we looked at our backlog going into Q3 it would have suggested that same level of mix.

As I indicated earlier, about 50% of our revenues coming out of backlog these days going into a new quarter, mid-quarter, as we fill out the revenue requirements for the quarter, it's really a matter of whatever the customer requirement is and it happened that in Q3 there were a lot of fill in orders of customers that already owned Selenias buying single units and so on and so forth.

So that the disconnect from, let's say our expectation was that the mixed changed dramatically from Q2 and it changed dramatically from what the backlog profile was going into Q3.

That's -- I understand that. I'm not trying to beat a dead horse. I was saying on a go-forward basis. If the mix -- if you thought for the year mix was going to be on a certain level

Right.

And your boxes are generally kind of coming where you thought they were going to come into, there is still a revenue disconnect, which is largely in breast health. I think we're all trying to figure out what is that disconnect. If the mix is kind of what you thought it was going to be and the boxes were kind of what you thought they were going to be, where is the revenue disconnect?

I think what our expectations are is that when we start looking at the trends of some our product configurations, not so much work stations even, but also some of our de-featured screening units. Those units that have been, that have been modified for screening only, hub spoke type distributed mammography applications, they do carry a lower ASP.

So that when we look at those in the market place, that does happen -- it's not pricing erosion, because you note that our gross margins will be improved as a result of selling them, because there is cost taken out of them as well. But that is another factor that as you look at absolute units and compare that to revenue dollars, there is a difference in terms of what the mathematically calculated ASP would yield as selling price as a result of these different types of Selenias that are now entering the market.

That's very clear. Thank you.

Just two more quick questions on this broader topic. One would be market share, Jack, you gave some interesting numbers on market share. If you just go off the MQSA data, which is an imperfect tool, it suggests some share moderation. If you could just sort of talk to that and maybe Glenn, if you could talk to update us on where we are on customer fulfillment. It's been coming down. Where are we now and when are we going to normalize customer fulfillment?

Well in MQSA we're around 57% market share and interesting, the number of, over the course of the last year, there has been some 400 additional units that are out in the field today. Where that's been the number of sites have gone down over the years and the number of units kind of held steady state, but there has been this increase of 400, which is surprising, but nice to see that there has been some expansion.

It could be just a sheer aging of the population, more women that are now age eligible to be getting mammograms. Although as you've read in the paper as I have that the American Cancer Society would like to see the interval follow-up a lot closer by women and whether in today's economic times or not that's going to be impacted going forward or not, we don't know. We don't see that because the waits are still so far out at most of the centers.

Our expectations are that we're going to continue to grow market share. I mean, we're not satisfied with a 57% and we expect that will be continuing to rise over the course of the next year. MQSA, I think I showed if I remember, 38% this year over this year as far as the amount of penetration, and if you looked at a year earlier, the penetration was about 22%. So we certainly have seen some very nice growth over the course of the next year -- over this last year.

You asked a question, David, that I'm not sure I understood you. You were trying to ask Glenn?

Yes. It was on fulfillment. Glenn's been talking about customer fulfillment levels coming down, which obviously has implications for backlog. I just want to know where we are in that process and when it's going to stabilize.

Yes, David, I think we have made terrific strides as far as fulfillment. As Rob mentioned, at the beginning of a quarter we have a pretty good idea of about 50% of the Selenias, where they will ship. At the last half of the quarter there is of course some change between customer (technical difficulties) based on customer readiness. Who is ready at that time to take a product.

So to the extent, a year ago our customer fulfillment was more driven by the manufacturing capacity and what we had in the supply chain. Today, it is focused more on customer readiness.

So if we think about the backlog we have now of 500 in one unit, I would expect that that may continue to drop ever so slightly. I would not expect as big of a drop as in this quarter. We are pretty close to where we want to be, and as Jack said earlier, this quarter, Q4, the summer quarter we do expect our orders for Selenias to be higher than Q3. So this will be an improved booking quarter for Hologic.

With that mind, we've also indicated we're expecting an increase in the number of Selenias that shipped and installed for revenue. So both of those numbers are going up. So to a certain extent, the backlog may come down ever so slightly, but we are close to where wanted to be as far as a 90-day or so cycle.

Okay. One last quick question. Just on leverage given, you know where the stock is trading today. Obviously, leverage is very, very strong in this quarter. When you think about your Selenias business either, Glenn, Jack, or Rob, and you think about the outlook for fiscal '09. The leverage we're seeing this quarter, do you think it's sustainable, can it improve, even in a more difficult Selenia mix environment.

I'm going to have Rob answer that. I just want to make sure also one thing, David, about backlog and that is when you look at the last six quarters we have averaged -- actually there hasn't been a quarter when we haven't been over 500 units in backlog. So it has been pretty steady stayed and our order rate, our trending on the order rate has also been pretty consistent, but as you can see it certainly did go up this quarter over last quarter and the quarter before. So it's trending in the right direction and I know there was some apprehension expressed about is it getting softer when we looked at from Q1 to Q2.

So with that, I think I will turn it over to Rob to ask a question, I was actually just buying him time probably.

No, not at all. I think as we look out at '09 we see continued improvement relative to gross margins and margins overall, and there is a couple of reasons for that. Glenn indicated some of the operating synergies and our efforts to cost reduce products, which is an ongoing effort in the company. And secondly, what we see is the introduction of couple of new platform products that will carry very attractive gross margins. The mainly tomosynthesis and in addition to that the introduction of Adiana and then, not the least of which being our Cervista high risk HPV test.

So all of those when look at gross margins will be additive in terms of gross margin returns, but hopefully that answers your question, David.

Thank you very much.

Sure.

Thank you. I will now move to Amit Bhalla with Citigroup.

Hi. It's Amit Bhalla with Citi. On the breast business, I understand the quarter-over-quarter decline in ASP's but I was hoping, Glenn, you could give me a little bit more color on the performances from the other businesses, the Suros, Mammopad, the service. Did we see sequential growth and wherever you can give me some more granularity on the sales, that would be helpful. That's where I'll start.

Yes. And this is Rob, the specific numbers we can share as well but the -- our IBS group or Interventional Breast Solutions group has strong sequential growth as we look at both our Atech business, Selero business and Mammopad business. The businesses achieving greater market share. We've had tremendous adoption of our Selera product, which is our handheld ultrasound guided biopsy product and in addition to that the Mammopad has been -- certainly not stellar growth -- but a steady growth business for us. And in fact we have very very optimistic expectations for that, as it is being integrated in with our Selenias sales at this point and time.

So when we look at it, that business is growing at a rate of $2 or $3 million a quarter and it is in terms of just our share of overall units we represent somewhere north of a third of all the vacuum units that are being sold. And we are rapidly becoming the preferred choice in the guided handheld biopsy market with our Selera.

And can you comment on service and can you give me a specific Suros dollar amount for the quarter, and I have just a couple of follow-ups.

Well we were hoping not to get all that specific on it. I think as Rob said we were -- that group was up a couple million dollars and we had growth in each of those areas, Selaras, Suros, Mammopad. Service in general was up by $4 million in the -- from Q2 to Q3. We hit and continues to grow. We hit $45 million in revenues for that Service group in Q3.

And that's expected to continue to grow. That's -- has become a rapidly growing business of ours as you'd expect as we have all these Selenias in the field and we're getting close to 90% compliance as far as customers buying a service contract either at the time of sale or very often even after the first year warranty and so we continue to expand that service business.

And just a last two here, what was ThinPrep volume in the quarter and, Rob, for fiscal 2009, give us an idea of how higher tomo prices are going to impact overall ASP's and your outlook for total Selenias units. Thanks.

Yes. As far as our diagnostic business what we saw was moderate growth for the quarter and that was primarily driven by greater imager adoption in the U.S. and very, very strong international growth. So that we're really holding the plan on the diagnostic business. There were no surprises. You know we have, we've been running in that area of really virtually flat in terms of VIO units or filter units for ThinPrep and the growth has been and remains one of higher imager adoption and international.

Relative to what we see going forward for next year, I think, when we look at ASP's, it will be much more on the digital mammography side. It'll be much more about some of the things that we are doing with different configurations of the product. We believe that we can go after a much deeper share of the low end market with some of the things that we're working on in terms of additional de-featuring of our Selenia.

We're in a tremendous position of advantage, because of the cost that we've taken out of the product and we continue to do that with some of the feature eliminations. And why we want to do that is, is that there has always been a question about how deep can we go into the digital mammography market, but we think we can take a much bigger share of the ultra low end with some of the things that we're working on.

That doesn't meant that we're going to cannibalize our mid-to-high end market, quite the contrary. Because when Selenia or Selenia Dimensions comes out, it will be sold as a 2D premium unit so it will sell at a price higher than Selenia and then finally when Tomo gets released it will sell at another $150,000 premium over that.

So what we're trying to do is really dissect the market into deeper penetration in the low and then capturing the high end with our advance technology and tomosynthesis. Does that answer your question?

Yes. And what was the outlook though for fiscal '09 units?

We haven't finished our plan yet and I would say that we are expecting unit growth just in summary, but it would be a disservice if I gave you a quick number other than that we are still optimistic about growth. Both domestic and clearly internationally on digital mammography.

All right. Thanks.

Sure.

Thank you, sir. And now moving on to Charles Chon with Goldman Sachs.

Yes, good morning. Thank you for taking the call. One housekeeping item to start. Can you breakdown the Selenia backlog number for us between US and international?

Glenn, do you want to --

Yes. Charlie, I do not have the exact number Charlie but we are tracking where we have been. Our bookings have been 80% US and 20% international, and our backlog pretty much reflects that.

Okay, great. Thank you very much. Just looking at the middle of the income statement here, I know there were some timing issues in R&D that created some of the sequential variability that we are seeing through the year up to this point. How should we think about R&D going forward? Should the fourth quarter R&D stay at the same absolute spending level, as we saw here in the third quarter, or is this a number that is determined as the percentage of revenues for you guys at this point?

Well in particular for Q4, if we look at the three categories in operating expenses, I would expect each of them to trend up slightly in Q4, and I say that actually without Third Wave, the numbers we are looking at now don't include Third Wave.

So, if we look at it as an absolute we should see those operating expenses increase by about $2 million. I think as we go forward though, Charlie, in absolute dollars they are not going to increase as fast as revenues, and you are going to see that on a percent of revenue basis these operating expenses are going to fall from the 30% down to the 29% level, and that includes R&D as well. Now Q4, of course, we now will have Third Wave. So, that will jump the R&D expense up considerably because we will be adding $9 to $10 million of total operating expenses from Third Wave.

And if I can add, on a dollar basis, there will be continued investment across all product lines. So, we don't see that trending downward. I agree that as a percentage of revenue it will, but in absolute dollars there will be ongoing investment in the breast health area, primarily as a result of advanced clinical trials over the course of '09 as we broaden our experience with tomosynthesis, and a lot of that will be used for reimbursement purposes, clearly in the area of both NovaSure and Adiana, we will have second-generation products that are already in our roadmap for those.

So that there will be ongoing investments of some substance. And obviously, Third Wave will be a very expensive R&D endeavor for us, but again, very positive in terms of the revenues that it will yield.

And, Rob, I think we want to do justice to diagnostics in that that we are investing in the diagnostics area where we have some new products advancements to our new imagers that are going to be coming out and we will be launching internationally first.

Absolutely.

Okay, great. And my final question is I just want to go back to a very basic question on backlog again. Can you help us understand how you have a sustainable business if the number of Selenia places continues to outpace the new orders? And why does backlog not need to grow meaningfully to give you that runway for continued growth in this category?

Well, it is a very good point. And if you look at the trend of our business, and we have always said that orders are rather lumpy, and so they are not linear. So when you might look at a couple of quarters ago, where we had a high concentration of very high volume orders that were shippable over multiple months, even multiple quarters, it created a surge in backlog, as you will. We have been working that off and, in fact, you are absolutely right, if at some point there is not a crossover or at least an equalization in terms of backlog being neutral, then there is no way to run the business on a book-and-bill basis.

We believe that the order rate will be very high for our Q4. As a result of that, we will be at a backlog-neutral state. And as long as we can remain backlog-neutral, or with some modifications, either slight increase or slight decreases, then that is a manageable business for us. Our most important factor is that our order rate continues to grow on a quarterly basis. And at some point, because of the surge in larger quantity orders, there will be excess orders over revenue in one given quarter, and then quite the reverse in another series of quarters thereafter.

So when we look at it, we try to look at our bookings rate in terms of our growth factor on much more of an annual basis or a rolling series of quarter basis, because there really is no linearity in the way that orders are received.

Thank you very much.

Thank you, sir. Tycho Peterson with JPMorgan has our next question.

Thanks for taking the call. On the configuration issues, not to beat a dead horse here, but, I guess one of the questions we are struggling with is, what is the underlying market dynamic here? Maybe, Rob, I will direct this to you, if you can give us a sense whether this is a function of more additional sales to your existing customer base or are you really pushing into those smaller tertiary centers? Then, as we think about that, just how often you are running into CR and whether you expected more of a pricing dynamic going forward? It would be helpful.

Sure. I think that if we think about the workstation mix element of our revenue, that is clearly one of just the dynamics of the orders, meaning that if in fact this happened to be a quarter where we were shipping to a lot of existing customers that did not need workstations, then it did change the composition of Selenia revenue or ASP is.

If we look normally, Tycho, as we go deeper into the market and sell to smaller accounts, the draw of workstations would actually be greater. It would be higher, because each of those would need a workstation, so it is not an incremental Selenia. What we may find as we go deeper into the market and we are doing much more head-to-head competition with likes of a Fuji or maybe another kind of low-end player, is that sure there will be much more aggressive pricing, but that is where we think this new series of de-featured Selenias will be a competitive advantage for us. It will have all the clinical benefits of a DR-type digital mammography system, but be featured equivalent to that of a CR system and be priced in that same pricing category.

Okay.

Does that help?

Yes, that does help. As I step back a little and look at what you had talked about last quarter, I mean some of this had been telegraphed but the broader question that I have here is in terms of systems planning, ERP, your ability to kind of forecast and have good visibility on the business going forward. Can you give us a sense as to, A) where your comfort level is and B) are there steps being taken to improve visibility? Because I do feel like there is a little bit of a disconnect between the message the Street tends to get intra-quarter and obviously the results we see here. So I am just wondering if you can comment on that.

Yes. As I said earlier, I think the -- we have visibility now because we have compressed our delivery date so much in terms of customers now are taking deliveries in 30 days and 60 days that about 50% of our revenue for the quarter is coming out of backlog. What that has done is put much more pressure on our ability or our needs to do not just planning of units and customers, but also a better job at configuration forecasting on the parts of our sales organization.

So we have modified our order planning process, so that now we always plan on a bi-weekly basis. Now what we have done is expand that, not more frequently, but more comprehensively. What that means is that our sales directors throughout the United States and abroad not only give us Selenia units but give us a Selenia configuration breakdown. So we know what units are going with workstations, what units are going with connectivity devices, what units are de-featured screening units versus otherwise.

So, we are making an effort and have made an effort over this past quarter to fine-tune the planning process to give us better visibility, not only for guidance for you folks, but also from our manufacturability point of view, so that we can fine-tune what our MRP might be to that given quarter or otherwise.

Okay. Then with regards to the detector point transition, can you just talk a little bit about what you are thinking for this coming quarter and next year? I mean, do we get over the big hump in that shift or?

You mean relative to --

To the OEM, the supplier agreement.

Third party? Yes, I think we will be out of that business by July of next year.

Well, we know we will be out of it except for service parts, but the reality is that is going to continue to thin out and we think that is good for our customers and for our sales for own differentiation.

Right.

The acceleration caught us a little bit by surprise at the level it was, but fundamentally it is again better for both us and it allows us to keep our own eye on our own product and only have to manufacturer one at our facility down in Delaware.

Just to add to that, we have a new design, FDA-approved detector that if we do not want to make available to a third-party. As a result of that, we were very direct in terms of not providing improvements on an OEM basis. So, by exiting this agreement, we have an advantage in our detector technology that is proprietary to Hologic. That is exactly the position that we want to be in.

Okay. Then just thinking a little bit about tomo, I do not know if you are willing kind of quantify the number of questions you have received from FDA, but some parameters on that will be helpful? Then, also, how do we think about booking revenues? I mean is there a longer validation period and when do you expect to start booking revenues in Europe for tomo?

Well, I will give you the depth of the questions. And that will give you an idea at least about how the FDA works. When we did our filing for the bone product relative to a software change, they came back with 15 pages of questions on a change for our bone densitometry system, which we were more than pleased to fill out. With the complexity of this system, quite frankly, it was in the same area, maybe a couple of more pages.

The number of pages isn't really -- it could be one page and be devastating to you, it could be 50 pages and it is a lot to do about nothing. I mean we take all their questions seriously. But, in this particular regard, they want to see the data sliced and diced the way they want to review it. We thought we had done that, but they have also changed out people at the FDA. There are some new folks that are there that maybe have a different orientation or focus than former members. Since this is a first of kind product they are giving at a very tight look.

It is nothing that we have not answered for other products that we have filed on. It's just going to take us to wait through the data to get back to them with this, but all the data is here in hand we will have gone through with all exhaustively over the weekend and Monday meeting to apportion who is doing what so we can get it back to them as soon as possible. Rob you want to?

Just to the other part of your question, Tycho, in our December quarter, we will be shipping tomo units in Europe.

And but in terms of the validation period, can you just comment on --

The validation period for the tomo unit?

Yes.

In what respect? I am sorry, maybe I misunderstood.

Even though there is an initial validation period over which you will not be booking revenues? Are you actually going to booking immediately on installation and--

No, they will get booked immediately on installation. I mean, we have been validating this product in the fields with baby units for probably the last six months.

Yes, okay.

So I mean, we have units in Europe. We have units throughout the United States is really our field validation. So, that these units when they ship, there'll be revenue upon installation just like the current Selenias are with maybe some modifications for software elements or things like that. Again, it is revenue upon shipment.

Okay. Then just finally on, as we think about HPV adoption in Europe, can you just talk a little bit about the infrastructure in place? How many labs are using in tests that was an ASR and how we think about the sales force and some of the other dynamics there going forward?

Yes. I mean, currently we are doing little with HPV in Europe meaning Third Wave was doing really virtually nothing with the product OUS, certainly shipping it domestically under an ASR model. Relative to what our expectations are for the current market, Howard's here, I would like Howard to maybe share on that a bit as well.

Yes. The customers that are currently using the HPV assay on the ASR format are obviously all in the US today. There was about mid-30s of those that exist. I think Jack in his comments had alluded to what our plans are from a training perspective next week. In the month of August we will have all US sales folks trained as well as our international folks.

We have approximately similar size sales teams in both of those markets in the Europe as we do in the US and we will be starting ground floor from an international perspective, but we will be trying to expand those customers that currently are using the ASR formats now as well as prepping others to be ready on day one upon FDA approval. All teams will be out hitting the street talking about the product, as we break through the balance of August and they complete their training.

Okay, great. Thank you very much.

Now, we will take a question from Peter Bye with Jefferies & Company.

Hey, thanks. Obviously pretty exhaustive questions. But just maybe, when you look at on the growth it is obviously decelerated the last two couple of quarters $22 to $13 million and I think your fiscal Q4 guidance implied 8% to 9% pro forma organic growth. Does that -- when does that turnaround? Do we have to wait for the impact of the new products in the US next year with the tomo launch, Adiana later in the year, and perhaps the HPV in the US at the end of fiscal Q2? How should I think about it when we look at next year? What is there to reverse the deceleration in growth?

I think a couple of things. Again I think that we have some exciting things happening on the breast health side and not just in the area of x-ray imaging or mammography. We have a brand new product platform coming out in our interventional products business, which will be a hands down competitive win over the other players in the marketplace, not that we have been lagging in that business at all. But, again this will be a driver for both international and our domestic customers.

Secondly, we are already on a recovery track for NovaSure which has been, if you take an averaging of these businesses, that business not growing has been a detriment to what our overall growth is quarter-to-quarter. We believe that we will back on track relative to NovaSure, as we enter into '09. So, that is a positive trend in addition to and this is irrespective of tomosynthesis or otherwise.

Secondly, or thirdly, I should say, we will have the introduction of Adiana into that market, which will be yet another new product that will drive growth. Then finally, we touched on our service annuity, that business is expected to grow in a rate of probably 35% to 40% next year.

So, when we look at these businesses, there is a little bit of a flattening that as you have indicated on quarter-over-quarter growth but for some of the reasons that we just gave looking at next year, we see a lot of bright prospects with respect to the product lines that I have covered.

So I guess, to sum, you think that fiscal Q4 is the trough in the deceleration of the growth rate?

Yes. I think what we are seeing is that for next year, we will have several new products or enhancements to products and three primary FDA clearances on enhancements to existing products or new products, which will drive growth.

Okay, great. And you guys, just pretty completely, but just on the mix of the Selenia systems, you would thought that fiscal Q2 with the mix was going to continue on with what you have in the order backlog, and it was running above historical trends. You ended essentially flat with historical [decisions], that would suggest the back half of the quarter was below historical trends on the mix shift within that. Is that a way to look at it?

Yes. We look at what happened in Q3. I mean, I will give you a specific data point just to I mean we went from 70% draw in workstations in Q2 down to about 55% draw. We normally run at around 60%.

You entered the quarter running at the higher end. So, it was a drop off below historical levels in the back half, but you have already seen that rebound and what we have seen in this quarter already today?

Well, what we are looking at is the trend from a bookings prospective that gets us back to what we thought the normalized trend would be for the out quarter meaning going into Q4. Now that doesn't mean that there will not be a further improvement. What our position was that over the next couple of quarters, actually I think we stated three, that we believe that we will resume the normalized trend of our workstation additions to Selenia gantries.

And that is for a couple of reasons as I said I mean clearly one thing that works against that mix as existing customers buy gantries, they do not always buy workstations, but the other offset of that is, as new customers that are lower end customers, are buying gantries they typically have to buy a workstation with their gantry because there are no other alternatives at that point for them.

The further enhancement to why more workstations will be sold is that, as they say, people are interested in the future. Tomosynthesis images or 3D mammography images are proprietary to our workstation.

So you will not be able to display tomo images, if you are using a third-party workstation and that is not because we designed it that way that is simply because there are, it is so new, that there are no standards relative to PACS companies or third-party workstation companies being able to display those protocols.

Okay. Great. And just, the last follow-up, could you give us the color on the tomo orders you have are they -- are you buying back their digital or they are keeping the Selenias?

Yes. These were all incremental units. We think for early adopters they are probably not going to trade in their Selenia, we think that they will end up buying an incremental unit and these are all just to be clear these are international units.

Right.

Right. But no -- I understood. Can you give us any sense of flavor of how long that runway is that for incremental before you will start doing the swap out?

We have said before that if we do a cross section of the US market right now there is probably 600 to 700 sites that would be defined as those are that are early adopter, academic sites, those that want to be first with technology. So, when we look out at the next couple of years, we will target those as being the sites that are probably new tomo systems, there could be existing Selenias customers, but are not trading in Selenias at that point.

Okay, thanks.

Thank you, Peter. The questions, the granularity that you folks are looking for we welcome so that we do not confuse you more than we normally do on every quarter's call and we spare Glenn a little bit.

Since I travel extensively internationally and have been active in presenting the tomosynthesis story, there is not one customer that I have talked to or sold the system to that even thought about--and these are Selenias users and non-Selenias users--even thought about a trade in.

Just what is happening internationally is the same that is happening in the U.S. and that is as mammography is continuing to grow there is more pressure on these centers to be able to try to treat the number of patients in a reasonable period of time and they need more systems clearly internationally than they do domestically.

Thank you, sir. Next we have Bruce Jackson with RBC Capital Markets.

Good morning. Speaking of this European 3D tomo unit, can you tell us are they being shipped with CAD and what average pricing are we getting on those units?

Well, I am going to let Rob answer this because he discounts and I never do. So, Rob, do you want to --

Generally, we have not sold a lot of CAD OUS, particularly in Europe and most of these have been in Europe. We would expect that when we start selling tomo units outside of Europe; let's say in Latin America and probably Asia, that there will be a CAD option that will be included in it. The pricing, as you recall, these are dealers that we are selling to and then the dealers are selling to an end customer. We have achieved the pricing target that we thought was appropriate for the dealers.

To be more specific, as we said, a tomo unit was probably going to sell for somewhere in the area of around $0.5 million, including the gantry, workstation, and the tomo features. While there is a dealer discount off of that, obviously on a transfer price basis and our dealer sales are going to average somewhere in the area of around $400,000, a little over $400,000 per unit.

All right. Then moving over to the diagnostic business, could we get the percentage of ThinPrep slides that were imaged during the quarter? Speaking of the new imager, can you tell us what the changes are compared to the existing imager?

Yes. For the quarter, we were approximately 60% of our ThinPreps in the US were imaged and in reference to some additional development work. If you really think about the very small laboratory, the labs under 10,000 annual preps per year, we are working on a solution that will be of lower cost, slightly de-featured. That will basically take your microscope and have a lot of the imager capabilities on it, where we can do it at certainly lower cost points and better margin for that business because the mathematics of smaller lab times to click fee just do not work for our larger units.

So this has been a development project for the last couple of years. We will be launching it internationally first by the end of '09 and we will plan on releasing that to the US market, but it is really for those laboratories that cannot play an imaging today, but would certainly like the increased quality and the incremental reimbursement associated with it. We think we have a very elegant solution for those folks.

I might add also, Howard, that is because our group added R2 what we have done is we have had our CAD group in California working with the CAD group in Marlborough to continually fine-tune our imager here and our algorithms, looking to improve those. So anything that we can do to provide more capability and insight to the pathologist and cytologist is clearly what we are wanting. We are certainly working in that regard to improve on that by itself in our current imager product.

The new imager will have algorithm improvements with it?

We have actually have a development project that actually we are working on a new algorithm that we believe will be placed into, obviously, the new product we are talking about today. At this point, we have plans of updating it in our existing platform as well.

Okay. Then last question, going to the Third Wave HPV ASR's, can you just talk a little bit about what your current pricing strategy is on that product compared to Digene? Are you going to be using the same pricing strategy once the test is launched commercially?

I think as we talked about the day of the acquisitions is that we are going to be in talking about global economics within the laboratory. As a refresher, we think that the real benefits of this product are several. The first is operational benefits. We think there is real hard dollars in savings for the operations of the laboratories that choose our assay. Second, again QNS, which is a problem today for laboratories, we continue to get reports that it is about 5% of the test. They cannot run the assay on using the Digene products out of the same profile. That goes down to around 1% when you used the Third Wave Cervista assay. So that is, again, real hard dollars associated with incremental revenue that is being lost by our laboratory customers today that will be gained in the future.

Having 16 and 18 genotyping is again going to be a new opportunity and new incremental revenue opportunity for those labs. I frankly think, the last thing we want to talk about is before we have covered all those bases there, is price. I think we are going to be price point because all of the other features and benefits that we have that add incremental revenue and take cost out of laboratories.

All right, thanks.

Thank you.

Thank you, sir. Now from SunTrust Robinson Humphrey, we have Jonathan Block.

Thank you. I think, just first question, if I can start with the pipeline. Jack, I know you mentioned that the FDA may be a bit overwhelmed with the number of the filings that they have in the front of them. There seems to be some concern among investors with the time line of some of other products that you have in the pipeline. So with what you know today, are you still comfortable when we turned to HPV and Adiana that those products were going to get through the process in the first half of your fiscal year '09?

I think you can guess my answer, and the answer is yes. First of all, it is a different group that is looking at it than the medical device side. We have been in really constant communication with them. They have done a wonderful job with the Third Wave people and with us.

Adiana, of course, we owe them the information which we'll be gathering starting next week. So we still and--you say we are optimistic--we are optimistic based on the response to-date. We have had several delays on the device side. It has been highly disappointing, which is an understatement. We have tried to comply with everything that they have asked. We have worked hand-in-hand with them. Reality is apparently that has not been good enough.

We think their questions are valid, good questions. We are going to try to make it easier for them to understand this data and we are going to also ask if they can work maybe harder to try to get through it when we give them that information. Hopefully, that can happen. But positive certainly on the Third Wave and the Adiana, and we already know where we are relative to tomo.

Okay. Maybe just a quick clarification on the Adiana. I believe in your prepared remarks you said no additional pregnancies. I was just a little confused. Is that you are talking about no additional pregnancies since the FDA came back to you and requested a third-year of data. Is that correct?

That is correct.

Okay. Shifting gears over to the mammo side, international was a little bit below our expectations. So, we would just love to hear some thoughts there. Is that just variability? Do you think you may have lost a little bit of share in the quarter? And then, I also think you mentioned an international order numbers, if you did, I missed it. Could you repeat it please?

Sure, I think Rob can do it. Because -- go ahead, Rob.

Yes, I think it is just that the whole discussion of linearity we had. Again, I think a couple of orders from a revenue perspective that did not shift. We also had a couple of new orders that due to timing did not come in, that have since come in. So I think we are going to see a bit of peaks and valleys. But, overall the international market is growing at a significant rate, I mean, certainly north of 20% easily.

Okay. Just one last one. We heard that GE had a pretty strong FFDM quarter here in. Maybe if you can just comment inter-player, was there anything different in terms of the dynamics between GE, Siemens, Fuji, et cetera?

No. I think we have seen the typical aggressive selling tactics on the parts of both players, GE and Siemens. I do not think that it was any more extraordinary that it has been. Again, I think are -- we've been running in the area of high 50s, low 60s relative to our market share and we remain consistent in that area.

I think there is always going to be a time where one of these competitors wins a large deal or a series of deals. In fact, not that any of us like it, but I think that keeps the markets rational. We want that to be the case, so that it's not -- the prices are not in a free fall because of desperation on the parts on one of our competitors. But I don't feel that we have lost market share if that is the specific question. I think, we are gaining share overseas and I think we have maintained our share in the U.S.

Okay, great. Thank you.

Thank you very much.

Thank you. Moving on to Isaac Ro with Leerink Swan.

Hello. Thank you for taking the question. If you look at your backlog for Selenias today versus where it was last quarter, how is the percent of new digital customers versus existing digital customers, how has that complexion changed?

In terms of defining the complexion change is --

I think, it means all customers versus taking market share away from GE or Siemens customer is that what you are saying?

Well, actually it has more to do with how many of the customers are brand new to digital altogether [inaudible] users versus digital.

Yes. I think that is a good question. I would still say that probably 75% of our customers are new customers that are just buying digital and 25% of those are buying additional digital units.

Okay. Then you mentioned that you are surprised in Selenias configuration is changing presumably that was in the back half of the quarter given your visibility cutting in. Was it due to a handful of large customers or just trying to understand how that surprise came about that you had a decent amount of visibility to start.

Well, let me --

Can I amend your word surprise, I think as the quarter unfolds and that we are taking new orders over the course of the quarter about 50% of the quarter is known at the beginning of the quarter. That is what is in backlog. So, as we are getting new orders the composition of those customers changed in terms of the composition that was received in Q2 and that is what led to the difference in terms of that mix of customers that were buying workstations and the mix that was not.

Again and I know we touched on it last quarter, and probably because of all the discussions around NovaSure, I didn't touch on it enough. It was really our Q2 that had an extraordinary high draw of workstations and peripheral devices in comparison to what happened in Q3.

Then the factor in Q3 was that as we filled out the quarter with those customers that are much more of a book and bill, it happened that the vast majority of those towards the later part of the quarter, who are all either existing customers that were buying normal Selenias for but no workstation, or it was customers that were buying just our screening units for their outlying satellite areas.

Okay. Then just to get back to that first question. You said 75% were new to digital. What was that ratio 75:25 this quarter what was it maybe a year ago?

I would say that, that is a good question as well. I would probably say that it was probably more like 90:10 given that there were far fewer customers that were repurchasing more Selenias at that point. There was a higher adoption of new customers converting to digital for the first time.

Okay. Then just lastly, just to clarify on tomo. You said each one requires its own workstation is that true as you scale up some multiple tomo systems as well?

What the real point that I am making is that if you are a Selenias user today and you use our workstation, if you buy a tomo unit, you don't have to buy a workstation. We will upgrade your workstation for you with software. If you do not use our workstation and you buy a tomo unit, you are a going to have to buy our workstation as well.

So, the reason why I think that is important for you to note is that as we sell Selenias today those customers that are thinking about the future recognize that in order to display at some point when they upgrade to tomo images it would be a much more cost effective for them to buy the workstations now. That was my point.

Okay. So, if your customer today that buys Selenia and does not choose to use the Hologic workstation, are you seeing anything in the market, is there a second or third-party workstation provider that is undercutting you on pricing that maybe the reason why you are not seen this high success rate?

What it really is that the customers would obviously prefer to use their PACS workstations, if they could. Their problem has been that since the inception of digital mammography the PACS companies have a difficult time in keeping up with the changing requirements of a sub-specialty like breast imaging. Because we are dedicated to breast imaging and our R&D resources going to only workstation requirements for breast imaging, it is really difficult for a generic workstation to have the same workflow and functionality as ours.

So, those that are on a tight budget and are not concerned with high volume workflow and do have a PACS, probably would end up using their PACS workstations. Those that are of a higher volume, or those that are not on a PACS, would end up buying our workstation because number one if you are interested in workflow and protocols flexibility that would be ours. And two, if you are a small entity it does not really have a PACS and uses the virtual PACS or storage, you are going to need our workstation in any event.

So, there is really not a lot of alternatives from a third-party standalone workstation. A couple of companies have things like that Axis sells one, Kodak sells one, I think Cidera up in Canada sells one those are not predominant factors. It is generally, if you are on a enterprise PACS then you are comfortable with using network station from mammography you probably won't buy the vendor's proprietary workstation.

Got it. And then just lastly, I saw the other day there was an FDA advisory on FFDM/PACS image identification issues is there any impact for you guys? Is your technology impacted by that?

No, as a matter of fact I mean, (inaudible) has a whole initiative that is IAG, which is digital mammography standardizations for the formatting of images and communications or otherwise. We are actually the industry co-chair on that and we think participating in the development for standard for digital mammography. So, we think we are in compliant with changing requirements relative to image structure and connectivity.

Great. That's it. That's it.

We will hear next from Jayson Bedford with Raymond James & Associates.

Thanks guys. In the interest of wrapping this up by noon, I will make it quick. Just quickly, Rob, the de-featured Selenia is that the Selenias S? And I am just wondering if so on a percentage basis how much does this represent of the total Selenias pie?

Yes, and when we look at it is a offshoot from the Selenias S and I will explain that in a minute. Then we are running at, on our S's and then our low end units, probably somewhere in the area of 14%, 15% of total Selenias. So that it is not on an overwhelming percentage of the numbers of units that are going out these days but it still it is a growing percentage. So, if you look back a year that number was probably around 5%.

If we think about the Selenias S it's a fully functioning new Selenia, all but for the capabilities to do diagnostics. What I am referring to is even a depth below that. It is a stripped Selenia with a modified acquisition counsel not the same workflow capabilities of even the Selenias S, and some of the other features that would be extracted from it are really designed to make it the equivalent of what a user experiences with let's say CR and the almost lack of workflow that you have with CR. So, it is really being designed to be a step above that.

Certainly below the S and will be on a pricing threshold that let this compete in a very basement place of the market where if there is that last 10% or 15% of units that will be sold in that battlefront that this new product or this de-featured product will be used to go to penetrate that.

Okay, that is helpful. Rob, just so I understand it, you can't sell the tomo product even for 2D until you get FDA approval, correct?

That is correct.

Okay. And then just lastly, I realized that you do not want to give '09 guidance but would you expect to grow earnings at least double digits in fiscal '09 possibly in the mid-teens?

Glenn, this is your moment.

Jayson, we were not prepared to go into '09 at all. I mean the part of the problem is, I do not even want to come up with an estimate that might be considered too low. I think we need to take the appropriate amount of time and to set the expectations appropriately, which we will do at the Q4 conference call.

But I think as we have discussed and we think about digital mammography in general, we are looking for an increase in the total number of units in '09. I think Rob said that earlier. And he also talked about many of the new products that will be coming out in the '09 timeframe that we expect to get traction in '09 and then certainly into '10. I think besides that if you look at the leverage we are beginning to exhibit both on the gross margin and cost of sales line, I think we are all pretty bullish about what is possible in the '09 timeframe.

Okay, Glenn. Outside of Third Wave, are there any large incremental costs that will hit the model in fiscal '09?

I do not know.

We are all looking at each other. I think the answer is no. The business is established. We have some new factory things going in Costa Rica with our surgical products, but those investments have already been made.

Right. Okay, fair enough. Thanks.

Thank you, Jayson.

Alan Croll, a private investor, has our next question.

Gentlemen, I am wondering whether your backlog represents 100% binding contracts or some of them are cancelable for the Selenia?

Go ahead, Rob.

There is nothing that would stop a customer from canceling an order. They are binding contracts, but clearly if a customer decides at any point, other than a week before we are about to put on the truck, that they can certainly exit one of our contracts. Now maybe another question should be, has that happened? I can tell you that of any of our Selenias orders, we have not had a Selenia order cancellation since the inception of the product.

The customers pays a restocking charge if they opt to cancel. The reality is, as Rob said, it has not happened. I remember that it happened in the first year of selling one customer and that was unless I can be corrected--that has not happened since we have sold several thousands of systems.

And does that include not coming back to you for price reduction in order to consummate the sale?

Once that agreement is signed that price is set.

Okay. I have another question about your press release. There is a discussion about some increases in costs of products sold associated with the write-off of a Third Wave inventory at fair value, and it says you have not determined the amount of increases because you have not yet valued the underlying assets. I am wondering how did you buy the company without valuing the underlying assets.

Glenn --

Peter in the --

No, it's Alan.

Alan, I'm sorry. Alan, in the purchase price allocation we take a number of different steps to value both the underlying technology and some of the R&D projects that would lead to an in-process R&D write-off. That is a pretty involved step that I think relates specific to some intangible assets as opposed to the ongoing value we think we will derive from the earnings of Third Wave over time. So this is an accounting allocation that needs to be made simply in the purchase accounting side of things.

Okay. And, two more questions. One, can you tell me what was the rationale for splitting the stock in the most recent split because it seems like the stock is already gone down 50% since that time? Was there any rationale to that split?

Yes. The split we are talking about is a split that was effected in early April, the two-for-one split. At that time, we were bullish and continue to be on the prospects of the company, and we felt that by splitting it, we could broaden the distribution of our stock at that time.

I would add this also, and that when you look at the drop, and that's as a shareholder that is a very fair question, I think more fair is the drop in the stock and that is that we took a big hit, as you know, last quarter.

Well, you have taken a big hit each of the last three quarters.

Well, that is good. Let's look at that. We have had record revenues and earnings for -- we had it for 17 consecutive quarters. Our revenue for the first time in 18 quarters was not a record, but we had 18 consecutive record earnings.

With that, we have faced an economy that is certainly been anemic where we have been in a recession although the current administration hasn't kind of figured that out yet. We took about a 7 point drop on NovaSure not meeting Street expectations which has been a lot to do about nothing.

The reality is though that in this quarter-to-quarter world you have you continually have to meet expectations. We have done that consistently, whether the Street believes that the fundamentals of this company are not as solid as they have once been, we cannot do anything about that except continue to try to outperform which we have done consistently.

I think the last thing this company would ever do is apologize for incredibly solid performance, and as a med-tech company, one of the best performing companies out there. We have unfortunately, and as a shareholder myself, that is considerably down as others are, we are bitterly disappointed by the Street's reaction to the last several quarters. As far as this quarter goes, we understand it more so than we clearly did last quarter. I leave the vagaries of guessing where the stock is going to go up to the analysts.

Well, I notice on the insider transactions that that confidence has not really been translated into purchases by insiders. In fact, when the stock was around 70 before this split there were many, many sales by insiders. Is your confidence going to be translated into further acquisitions of shares by yourself or by your peers?

Well, I can tell you this that we have been unable to, because of the Third Wave transaction, to make any purchases during this last quarter, which obviously we all would have done at the price of the stock. And our windows as a senior team are much, much limited compared to a person at not the Senior VP level or Director level or above, but it is a fair question.

At the price point it is today, it certainly is an appealing one as long as we are not blocked by our attorneys.

Okay, thank you.

Thank you for the questions.

Thank you. We will now hear from Mike Child with Civic Global Health.

Hi. Two questions. One is on your Q4 guidance for Selenia unit sales; can you give us a rough idea of the US versus OUS breakdown? I think historically its range between 18% to 24% as OUS.

I think it's going to be probably in that same area of the 80/20, maybe a percent or two maybe south of that. But Steve? 100 units potentially internationally in the balance in the US.

Okay. Jack, I think in your prepared remarks you mentioned something about double-digit growth in fiscal '09. Did I mishear that, and then what were you referring to? Was it top line or bottom line or --

I was referring to NovaSure. So you actually don't talk extemporaneously --

Okay. All right. Thanks.

It was for NovaSure. We had said it in the last quarter that we thought based on the information we had we thought it would be around 9% and the Street said you can't do better than that We said until we got at least through the quarter and into the fourth quarter, we would not be able to, we would not come back and say any more.

But we have vetted a lot of issues there. Our sales force has responded positively. Our customers have responded positively. We have got a growing percent of backlog that will be used each quarter to make our number. So we are feeling certainly more confident in double-digits is where we are in NovaSure for next year.

Okay. Great. Thank you.

Thank you.

Sir, it appears that we have no further questions. I will turn the conference back over to you for any closing or additional remarks.

Well, I think anything at this point might be anticlimactic. I appreciate everyone's patience as we have done a two-hour call. I would like to thank all of the associates for Hologic worldwide for their unwavering commitment to delivering certainly the best technology available, the best service available. They have consistently outperformed. And our goal of trying to be a company providing the best technology for women is something that we take passionately and we will continue to.

We also understand the frustration of our shareholders. We continue to work to outperform. I think our record shows that. The record of our gross margin, the record of our EPS I think is an indication. We certainly have our hands around this business, even if there is a drip in our revenue it shows that fundamentally we clearly know what we are doing.

We cannot manage the things that we -- like the FDA and other things that are beyond our control. All we can do is continue to work within the system and try to get it to work more in our favor. That is what we are going to work hard on in this next coming quarter. We are still very optimistic for the future of this company. That has never changed. Going forward, we expect great things.

So with that, I thank everybody for taking the time to be with us today and wish them good health. Thank you very much, Wendy.

You are welcome sir. That does conclude today's conference call. Thank you for your participation. Have a great day.