Hologic Inc (HOLX) 2009 Q1 法說會逐字稿

Good afternoon, and welcome to the Hologic Inc. first quarter fiscal 2009 earnings conference call. Today's conference is being recorded. All lines have been placed on mute.

I would now like to introduce Deborah Gordon, Vice President, Investor Relations ,to begin the call.

Thank you, Paul. Good afternoon, and thank you for joining us for Hologic's first quarter fiscal 2009 earnings conference call. I encourage everyone to visit Hologic's Investor Relations page of our website in order to view the PowerPoint presentation related to the comments that Glenn Muir, Hologic's Chief Financial Officer, will be making in his opening remarks.

The replay of this conference call will be archived on our website. Please also note that a copy of the press release discussing our first quarter results, as well as our second quarter and fiscal year 2009 guidance, is available in the Investor Relations section of our website under the heading Financial Results.

Before we begin, I would like to remind you of our Safe Harbor Statement. Certain statements made by management of Hologic during the course of this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause actual results, performance, or achievements of Hologic to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, those detailed from time to time in the Company's filings with the Securities & Exchange Commission. We expressly disclaim any obligation or undertaking to publicly release 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 statements are based.

Also during this call we will be discussing certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP. A reconciliation of these non-GAAP financial measures to the related GAAP financial measures can be found in Hologic's first quarter 2009 earnings release, including the financial tables in the release.

Please note that today's conference call will consist of it approximately 30 minutes of opening remarks from management, followed by a 30-minute question and answer session. We therefore ask each participant to limit his or her questions to just one, with one follow-up as necessary.

I would now like to turn the call over to Mr. Jack Cumming, Chairman and CEO.

Thank you very much, Deb. Good afternoon, everybody, and thank you for attending our first quarter fiscal 2009 conference call. Joining me today on the call is Rob Cascella, our President and COO; Glenn Muir, our Executive VP and CFO; also joining me today is Tony Kingsley, Senior VP and GM of our Surgical group, and Howard Doran, Senior VP and GM of our Diagnostics group. Also with us today is Dr. Jay Stein, our co-founder and Chief Technology Officer.

I will start the proceedings with an overview of our business performance in the recently completed quarter. I will also update you on how we are addressing the challenges created by the recession, and incorporating those macro factors into our guidance. Glenn will then discuss the financial results for the first quarter and provide the details of our guidance for the second quarter and fiscal 2009. We will then open up the call for Q&A. As Deb stated, we plan to conclude this call in an hour, out of respect for everybody's time.

As I stated on our November 11th call last year, 2009 will be a transitional year for Hologic as we continue to await FDA approval of three next generation technologies, integrate our two fiscal 2008 acquisitions, and strengthen our infrastructure through manufacturing efficiencies. The recession that has engulfed America has added a major challenge to this transition, especially given its speed, magnitude, and global consequences. Regardless of the impact to the top line, our strong cash position, financial resources, and product pipeline give me confidence Hologic will weather this economic storm and remain on path to emerge stronger in 2010.

As stated in our press release, Q1 FY '09 revenues totaled $429.2 million, a 16% increase over the first quarter of fiscal 2008, though slightly below our original guidance. This growth was primarily due to the contributions from our Cytyc and Third Wave acquisitions with the inclusion of diagnostics, surgical and MammoSite product lines for a fuel thirteen weeks versus only ten weeks in the first quarter last year. For the first quarter fiscal 2009 our non-GAAP earnings per diluted share was $0.31 which exceeded our original guidance of $0.29 to $0.30 per share and compares to non-GAAP EPS of $0.27 for the same period last year.

I would like to now take a minute to briefly provide the first quarter revenue overview by segment. Breast Health revenues were $199.1 million and rose 1% compared to the same period in fiscal '08. In the quarter, service revenue related to our Selenia Full Field Digital mammography systems and revenues from our Suros Breast Biopsy systems produced steady gains. This increase was largely offset by fewer Selenia systems sold which was noticeably impacted by the significant economic downturn in the US hospital market resulting in segment revenues falling short of our original expectations. Hospital capital spending has been constrained, as capital markets have tightened, endowment income has declined and uncompensated care has decreased due to rising unemployment. During the first quarter, this translated into a number of projected Selenia orders being placed on hold by hospitals.

On a more positive note, we continue to see strong interest internationally for our Selenia Dimensions tomosynthesis 3D mammography system where we sold more systems during fiscal Q1 as compared to last quarter.

Diagnostics revenue totaled $134.6 million and increased 34% compared to the same period in fiscal '08. This segment included revenues from the acquisitions of Cytyc and Third Wave. We had a solid quarter of ThinPrep pap test sales worldwide with US sales consistent with historical trends while international sales showed steady gains. In addition, imager adoption continued to increase in the United States.

We're excited about the European launches of our T 5000, ThinPrep processor, and our Cervista HPV test in the quarter, and while their contribution to revenues was nominal, initial feedback is positive.

GYN surgical revenues totaled $68 million for Q1 FY '09, and rose 36% compared to $49.9 million for Q1 FY '08. NovaSure system sales reached a record quarterly high led by steady progress in office-based procedures, as well as continued growth in standing monthly order agreements. We received CE mark for Adiana and launched last month in select European countries.

Skeletal Health revenues totaled $27.5 million compared to $24.3 million for the same period in fiscal '08, a respectable gain given the weakness in domestic hospital spending. The increase was primarily the result of improved systems sales of the osteoporosis assessment and Mini C-arm product line.

Turning to our new product pipeline, we are awaiting FDA approval for our three PMA products, Selenia Dimensions, Cervista, and Adiana. As I stated, our Q4 FY '08 earnings call, we do not expect much news from the FDA before approval. Since our last conference call there has not been any change. We are in touch with the FDA continually and are hopeful we will receive approval for all of these products in fiscal 2009.

As you know from our pre announcement on January 12th, the recession has had a profound impact on the momentum of converting analog mammography systems to digital within the US hospital market which significantly affected our digital mammography and top line revenue in fiscal Q1. You also know we announced at the same time through cost control measures we implemented during the quarter we preserved our earnings in the face of this revenue shortfall and our bottom line exceeded our expectations.

I would now like to briefly address the actions we have taken to manage through this difficult period. Aside from staying in front of our customers and continuing to support those relationships, we are taking measures during this economic slump to preserve our earnings and long-term opportunities. Specifically, we initiated rigorous cost control measures during fiscal Q1 to limit spending programs that protected our leadership position in the market, drive our revenue stream, and serve our customers' best interests. These measures are broad based and take into account every aspect of the company's operation.

For instance, we have implemented a corporate wide hiring freeze, eliminated a number of positions worldwide, placed certain nonessential capital projects, clinical studies and low payback marketing programs on hold. We've reduced the bonus and profit sharing programs and cut general spending across the board. However, it is absolutely critical we protect our future. Therefore, we continue to focus our resources on areas we expect to generate positive returns and allow to us remain committed to our long-term goals, such as our major research and development projects for 2009 and our sales and customer service activities.

Turning now to our guidance, Glenn will provide you with the specifics for fiscal Q2 and fiscal 2009. Let me first emphasize, we have gone through a very comprehensive and cautious process in arriving at our forecast, a course of action that is very mindful of the current economic malaise. In arriving at a going forward guidance armed with today's knowledge that leading economic indicators point to a deepening recession, we have weighed these important macroeconomic factors. First there are mounting pressures on hospital capital budgets, especially with regard to our Breast Health product line. Second, unemployment is accelerating in America. Third, the financial health and economic outlook of leading industrial countries is eroding, and finally the US government stimulus package will not begin to take hold in a meaningful way until 2010.

Given all of this this, visibility is hazy at best and admittedly clouds our ability to make precise predictions for the balance of our fiscal year. What we are projecting is the following. Given the negative impact to our Breast Health business, and Selenia sales in particular during fiscal Q1, we believe domestic sales of Selenia systems will be down in total this fiscal year from 2008. We expect our international business to grow modestly from 2008, though we have also tempered that growth under the expectation these economic headwinds will increase in foreign markets as the year progresses. In total, Breast Health revenues will be down for fiscal 2009, driven by the substantial slowing of Selenia sales domestically. In fact, this is the principle reason behind our overall reduced fiscal 2009 company guidance.

For the second half of fiscal '09, we expect our Diagnostics and GYN surgical businesses to perform relatively consistent with the first six months of this fiscal year which implies year-over-year growth in the low double-digit range. Although we have not yet experienced an impact from the economy on these businesses, we have modeled in some softness to this forecast. Let me emphasize, an important element to our overall guidance is the ongoing contribution of our disposable businesses. As a reminder, our disposable line of products is approaching 60% of our revenues, while capital equipment products are the balance, and on average the products in these segments carry higher gross margins than our mammography equipment. This contributed to ending the quarter with a gross margin percentage on a non-GAAP basis at a higher rate than initial expectations. Overall, what this means is that our earnings are not as sensitive to a Selenia revenue shortfall as they once were, particularly given the cost control measures implemented last fiscal year which further insulate our earnings.

Now for more detail on the company's financial (inaudible) and guidance, I will turn the call over to Glenn.

Thanks, Jack. Jack addressed our first quarter revenue performance and noted that revenues in each of our four reported segments increased year-over-year. However, we did fall short of guidance due to a shortfall of Selenia sales in the US, as we began to see the effects of the faltering economy on the hospital market.

Turning to the rest of the P&L, our gross margins on a non-GAAP basis increased to 62.6% which excludes approximately $37 million of amortization of intangibles compared to our non-GAAP expected gross margin of 61%. This gross margin improvement was due primarily to a significant increase in higher margin sales, such as the NovaSure products, and lower manufacturing product and service related costs. On a GAAP basis gross margins were 53.7%.

Our efforts to proactively reduce discretionary expenses, implement new cost control initiatives, and freeze all new hiring resulted in a favorable outcome, as our expected operating expenses on a GAAP basis of $136.9 million, including the anticipated amortization of intangibles of approximately $13 million, came in below our original guidance of $149 million to $151 million. Absent the acquisition related charges, pretax earnings this quarter were $123.4 million. Using our effective tax rate of 35%, non-GAAP net income was $80.2 million versus non-GAAP net income of $59.7 million last year, an increase of 34%. Our tax rate benefited from the retroactive application of the recent reinstatement of the federal R&D credit.

We reported fully diluted non-GAAP EPS this quarter adjusted for acquisition costs of $0.31 versus $0.27 a year ago, which was slightly ahead of our guidance on our last earnings call. This adjusted EPS includes Third Wave which incurred an adjusted pre-tax loss of $15 million comprised of an operating loss of $8 million, and interest expense of $7 million. This equates to $0.04 per share after tax loss, also in line with our expectations. Absent Third Wave dilution, our earnings and EPS would have achieved a record high.

As noted in the press release, our total dollar backlog for all of our products was $339 million at the end of December, down from $360 million at the end of September. This decrease of 6% was primarily from the shortfall of Selenia digital mammography systems we had expected to be booked at the end of the quarter. Our first quarter actual selling period was also effectively shortened by the timing of RSNA and an unfavorable holiday schedule. Turning to the balance sheet, on July 17th in connection with the acquisition of Third Wave, we borrowed $540 million. At the end of December we had already repaid $104 million of the term loan, leaving a balance of $436 million, and as of today our balance has been further reduced to $377 million. Given our strong cash flow, we still expect to pay this new term loan off within the two and-a-half year period we originally guided to. We generated $107.5 million of free cash flow in the first quarter of fiscal 2009 comprised of $121 million from cash flow from operations, less capital expenditures of $13.5 million.

I would now like to provide detail on our guidance for our second fiscal quarter, and high level guidance for the fiscal year. For the second quarter of fiscal 2009 which ends on March 28th, we are expecting revenues in the range of $400 million to $410 million. This decline is due to two primary factors. First, a $12 million to $18 million sequential decline in our Breast Health segment related to our mammography business as we expect to sell fewer Selenia's, Multicare biopsy tables and analog mammography systems. The economic uncertainty is clearly affecting our hospital customers who are being more cautious, and in a growing number of cases delaying or postponing new capital equipment purchases.

Second, a modest sequential decline in our GYN surgical segment where we expect to sell fewer NovaSure endometrial oblation hand pieces in the March quarter. We have just come off a record revenue quarter of $67.5 million for NovaSure and expect to see a seasonal slowdown partly due to the new year resetting of patient deductibles. Nonetheless, we're still expecting 10% growth over the prior year's quarter as our strategy of growing the physician market continues to increase demand. And finally, we're also expecting a small decline in our Skeletal Health business of between $2 million and $4 million.

We expect non-GAAP earnings per share, excluding the amortization of intangibles, of $0.26 to $0.28 per diluted share. This includes the results of Third Wave which are diluted to adjusted EPS by $0.03.

Our earnings guidance takes into account the following key P&L considerations. First, gross margins on a non-GAAP basis are expected to decrease slightly with the just ended first quarter to 62%. Second, total operating expenses on a non-GAAP basis are expected to rise slightly on a sequential basis to $126 million to $128 million, or 31% of revenue. The small incremental increase compared to the prior quarter relates to an increase in R&D expenses due to the timing of project timelines.

As mentioned earlier, we did enact various cost control initiatives in Q1 and continued the effort into Q2 with the reduction in our workforce of about 2%. We'll begin to see further benefits in the Q3 and Q4 timeframe. I think it is important to note that although the non-GAAP operating expense range projected of $126 million to $128 million is flat with one year ago, the second quarter of '08, it does also include $12 million to $13 million of new operating expenses at Third Wave. Third, we expect interest expense to decrease slightly to approximately $17 million. Lastly, for Q2 we are expecting the effective tax rate to remain at 34% as we benefit from some state tax law changes.

Next, our outlook for fiscal 2009. We are targeting total revenues of $1.625 billion to $1.675 billion, driven primarily by an increase in our Diagnostics business which includes the currently available Third Wave products and growth in NovaSure. This is offset by anticipated decreases in our mammography business, primarily from Selenia. Our revenue guidance does not assume any US sales of the three products currently awaiting FDA PMA approval, tomosynthesis, Cervista HPV and Adiana.

We're looking for full year gross margins in the range of 61% to 62% on a non-GAAP basis. Gross margins are expected to remain flat with fiscal 2008, largely due to flat revenue expectations and a shift to higher margin disposable products which are offset by an unfavorable mix and an increase in unabsorbed overhead from fewer systems manufactured and at our new Costa Rica facility. We expect to see gross margin improvement once mammography revenues begin to rebound, sales of our three products currently awaiting FDA approval are fully ramped up, and the manufacturing startup costs at the new Costa Rica facility are absorbed.

We are expecting operating expenses in the range of $500 million to $520 million, excluding the amortization and write off of intangibles. Regarding stock option charges included above are approximately $28 million of FAS 123-R stock comp charges. We have not backed them out of our guidance but will indicate what they are quarterly and will disclose them in the press release, as we currently do.

For interest expense, we would expect interest expense based on current LIBOR rates to decrease slightly year-over-year to approximately $70 million which is composed of our convertible debt plus the current term loan. Our effective tax rate for the year is expected to be 35%. In Q2 we are expecting a lower tax rate at 34%, the same as in Q1, and in quarters three and four we're expecting it to rise to 36%. We expect non-GAAP adjusted EPS of $1.10 to $1.15 per share. This includes the full-year results of Third Wave, excluding any US contribution for Cervista HPV. Absent the operating loss and increased interest expense for the year attributable to Third Wave, our non-GAAP EPS guidance would have been $0.12 higher or $1.22 to $1.27 per share.

In fiscal 2009 we will remain strongly cash flow positive and will not require any financing to fund our operations. We expect to generate a minimum of $100 million of free cash flow a quarter and to continue to steadily pay down our term loan. Capital expenditures have never been a big part of our business, and we are expecting CapEx of $65 million and depreciation of also approximately $70 million.

With that, let me now turn the call back to Jack. Jack?

Thank you, Glen. In closing, we are operating in a climate of economic turmoil with considerable uncertainty regarding its future and for Hologic, there are a few things we are very sure about. Despite the economic crisis we will strive to maintain our leadership in all of the major markets we serve. We will work to sustain our number one position by providing excellent service to our customers and being responsive to their needs. And we're confident and believe in the passion and commitment of our worldwide team of Hologic associates. We are going to continue to invest in our future by building on our core products, develop our pipeline, and pioneer new products to position Hologic for the future, and we're going to accomplish this with disciplined, financial management. We view these factors as a strong combination which will enable us to ride out the current downturn, see our way through the 2009 transitional challenges, and emerge as a stronger company, well-positioned to execute our growth plans for 2010 and beyond.

This now concludes our opening remarks. Glenn, Rob, Tony, Howard and myself will be happy to answer any of your questions. In order to allow for as many investors as possible to ask questions, I remind you to please observe Deborah Gordon's earlier request that you limit questions to one with one follow-up as necessary. And with that, Paul, let's open this up to Q&A.

Yes, sir. (Operator Instructions). We'll go to our first question from Tycho Peterson with JPMorgan.

Good afternoon. Maybe just starting off with a question on NovaSure. I'm wondering if you can give us a sense as to how sustainable some of the trends that you're seeing are? I know you talked about a modest quarter over quarter decline in the coming quarter, but can you give us a sense what some of the market dynamics are like for NovaSure today?

Certainly, Tycho. This is Jack. I am going to pass the baton to Tony who will be able to answer that.

Great. Thanks, Tycho. The market trends are quite positive on NovaSure. We did indeed have a very good quarter. We do believe that our strategy focused on driving procedures is taking traction.

A couple of things have not changed. We still think the condition is under treated and there is a big potential market there. Our competitive position, if anything, has improved based on some recent clinical data. We don't think NovaSure is completely immune, obviously, to the economy. We have not seen any signs of a decline in procedure volume yet and have not fundamentally change our outlook in the US for the full year. It is, as you know, not an elective procedure but it's certainly deferrable, so we do expect to see, as we typically do in the second fiscal quarter, a bigger challenge because of the economics, particularly around patient deductibles.

That's helpful. Maybe to follow up on mammography, can you give us a sense, maybe Rob, if there are any dynamics here in terms of configuration issues? I know you talked in the past about some of the configuration changes you have seen. Can you give us a sense what you're seeing in the current environment?

Sure, Tycho. Yes, we are seeing a move to lower end units, our remanufactured units, as well as our screening units, domestically or in the US market. That's not to say we're not selling standard Selenias but the drive has been much more about a product mix change relative to low end units that are now being sold to single user sites. Outside the United States it is a bit of business as usual with the exception that we are certainly selling higher end products like our Dimensions tomosynthesis product.

Take our next question from David Lewis with Morgan Stanley.

Good afternoon. Jack, I wanted to focus here on guidance. You're saying guidance essentially implies that things are going to get worse. I am trying to get a sense of the magnitude of that. If we look at your guidance for the next quarter; it implies an $80 million change to guidance. You're obviously changing it by a much more substantial degree. So are you saying you're changing things to reflect an environment much worse than what you have seen in December, much worse what you've seen in January, and much worse than backlog would assume?

What we're saying is we're dealing with in Q2 first of all historically a soft water for all of our products, so that is one element of what we had to take into consideration. Secondly, we clearly see that this quarter will be softer than last quarter because of all the economic factors that you and I are reading about every day. So, yes, it is going to be worse this quarter, but for the NovaSure and Diagnostics -- excuse me, for the Diagnostics and the NovaSure business, it is only going to be down because it is historically soft in this quarter, not for any other reason.

Did your guidance assume, NovaSure has always been soft in this quarter, but does your guidance assume the Breast Health business gets worse after this quarter or stabilizes after this quarter?

We think it is going to stabilize, but that's based on basically what we know today.

Our next question will come from Amit Bhalla with Citi.

Thanks for taking the question. I wanted to go with a little bit more about the Selenia overseas. Can you give us a little bit more color on that performance in the second quarter. Historically overseas has been about 25% of unit sales. I know you're not going to go into the units specifically, but I am wondering about the trend overseas. And then also talk a little bit more about overseas in your guidance for fiscal '09, the assumptions there. And I have one follow-up.

Sure. I think I will let Rob answer the one in international. I should go back to David's one and just to say to David again in that, with the Selenia business out Q3 and Q4, our assumptions clearly were that it was going to mirror what happened in Q2. So that softness would continue, but would not degrade any more than what we've seen. And when I said it depends on the factors, it clearly is economic factors. That is the only driver of what makes the product sales going to go up and down, and it is the unemployment that worries us the most because that's what's hurting the hospitals from the standpoint of the uncompensated care which continues to mount because of the unemployment rising. Rob?

Internationally we are seeing pockets of trends, so it is difficult to categorize or summarize the international market as one. Traditional markets in Europe, such as the UK, certainly suffering, budget dollars are being withdrawn, more traditional markets in Germany, some of the Mediterranean countries, we're not seeing strong areas of growth. But surprisingly the Middle East, north Africa, even Latin America with currency woes still are recording strong areas of growth and purchasing product. So it is very selective, and we are mobilizing different strategies to respond to those markets, either through management of currency, management of pricing, management of different configurations.

I also had a question about fiscal 2009, the assumptions behind the growth overseas. But I wanted to know also for the second quarter -- or sorry, fiscal 1Q -- did overseas units actually grow for Selenia? And my follow-up was regarding ThinPrep. What is the assumption on screening volumes since we are seeing screening slow down overall in the hospital markets?

I will let Rob answer the question on the mammography and then we'll go to Howard on the Diagnostics.

Sure. Our unit volume was up internationally by a small percentage, but nonetheless was up, and we're anticipating continued strength in that market for the balance of the year.

Howard, do you want to address the --

Sure. From a ThinPrep unit perspective, I would first like to point out that this past quarter actually was record volume for total world in ThinPrep units. From a US perspective, if you go back over the last five to six years and you look at the total volume on an annualized basis, the numbers are within 1 million units per year within themselves. This past quarter certainly fell right in that historical average. And right now our outlook for this year will fall in that average again. So we think it will stay very much towards the historic trends with some additional growth and volume, predominantly coming from outside the US.

We have a question next from Isaac Ro with Leerink Swann.

Hi, guys, thanks for taking the question. I just wanted to drill a little more on your guidance, your conservatism, really on two specific levels. One is, are you guys concerned at all about the competitive landscape becoming a little tough from a pricing standpoint? I know it is sort of an apples to orange comparison, but GE talked about new orders being down 30% in the quarter, so are you worried at all you might see more aggressive pricing from some of these guys? And secondly, to the comment that was just made on ThinPrep, it seems like, using the last five or six years as a precedent, it might be a bit optimistic even in a business like ThinPrep. So just wondering, do you feel like you have been sufficiently conservative on both of those items?

I think what our guidance reflects is really an overall thought process relative to competition, what happens to AUPs, what happens with configuration, what happens with consolidation as in the ThinPrep market. All of those things have been factored in, which is the result of the guidance that we put forth today.

Secondly, I think you mentioned your guidance did not include service to revenues in the US but it does include service to contribution from O US. And if that's the case,can you give us a range as to what you think it does?

It does, and it is really nominal. There is significant heavy lifting relative to country adoption of Cervista with some clinical work that is yet to be done. So although we have launched, we're not anticipating a meaningful level of revenue O US for Cervista.

Thanks.

We'll go next to Ed Shenkan with Needham & Company.

Wanted to follow a up a little bit on the international revenues. To date did you see any slowdown in the international business?

I think the businesses that are being affected by it would be primarily our capital equipment business, and some of that is caused by the recent strengthening of the dollar made our products more expensive, obviously. In some of the principle markets in Europe, there are major recessionary trends that are affecting buying patterns, and public sector funding. So what our challenge is is really to find those markets where there remains growth, and there are those opportunities as has been evidenced by our Q1 results.

Rob, I would add that international, again, is a term that doesn't adequately pinpoint the markets, and that is that on a broad brush internationally you can be doing well but then you have to go market by market. As an example, the UK is going through a very tough economic time right now, as is France. So, consequently, when we look at those markets, we expect that those markets are going to be harder hit than other markets for the capital equipment side. But as Rob pointed out, when you look at Latin America, and you look at the Middle East, and you look at some other countries in Europe, things are going well. Markets have not been affected by the economy as yet. So it is really a country by country versus broad brush global.

In the UK and in France, have you seen a slowdown already? We know those economies are slow but has it impacted your business in the December quarter or the month of January?

I see more, what the NHS announced was, which was public information, that they are going to put 100 million pounds behind the conversion from analog to digital over a three-year period. I think you would be hard pressed to find those dollars today. We just coincidentally got a fair number of orders from the UK here in the last two weeks. I think there was some pent up demand on that based on the fact those orders did not come through last quarter because of dollars that were unavailable, that somehow freed up today. I would say that I would not look for growth in the UK over the course of the next year. And in France, certainly has been more vocal about their problems, much less the strike that they had the other day because the general population isn't happy with what the government is doing to prop up the economy. So I think we're going to see it in France, and we're clearly going to see it in the UK.

Thank you.

Our next question is from Jonathan Block with Suntrust Robinson Humphrey.

Thanks and good afternoon. First question, just curious if we can get any more details on the Diagnostic segment. In other words, maybe the percent of paps, image, and anything changed now that FocalPoint is out there, and maybe directionally anything around Adeza.

That's a good question, and Howard I am sure is anxious to answer this one.

Thanks, Jonathan. In regards to imager, we continue to be very pleased with the adoption of, obviously, our manual ThinPrep base over to imaging. I would tell you that right now it is in the middle 60s from a conversion standpoint, and we anticipate adding between one and two market share points per quarter for the remainder of 2009. Obviously with both national labs engaged in imaging that's really spurring that business quite a bit over the last couple of years.

In regards to Adeza we have shown year-over-year growth. Obviously the challenge there is continuing to convince the clinicians the value of using fetal fibronectin in their at risk patient population. That's a little bit heavier lifting than obviously the patient that arrives to the hospital with signs and symptoms. We are seeing slow bits of improvement on the amount of volume going to our national labs which basically says that message is sticking, but I would call it heavy lifting. But we continue to see growth in the product, but until we really crack in a major way, larger volumes of at risk testing, it will be slower grower.

Great. And then just the follow-up would be maybe two parts. First on NovaSure, so we can get a percent that's being done in the office, and the second one just moves on over to Gestiva. Is there an update to the timing where you are supposed to collect I think the final $80 million? Thank you.

Tony?

Jonathan, it is Tony. We did in the recent quarter 13.6% of our unit volume was in the office. That's up from 10.7% a year ago, and we continue to see steady growth both moving people into the office and also withstanding order programs, getting our existing offices to increase utilization.

Relative to Gestiva, obviously it is fairly public some of the trials and tribulations that KV is going through at the moment. We continue to press forward with the studies that have been asked by the FDA to get that product approved, and we'll continue to move in that direction, and we'll see, at that point, where KV is going to be. We have had no communication from them that anything relative to our transaction at this point was off track, but we'll wait until the time we get it approved.

Thank you.

Our next question comes from Peter Bye with Jefferies & Company.

Good afternoon. This is actually Josh Jennings in for Peter. Going back to the international business again, sorry to harp on it more, but just to clarify, you are expecting growth internationally this year for the Selenia business, one? And then, two, just so you could comment, I know it is still a little bit early on the Adiana product but how those European launches are going for Adiana and tomosynthesis.

Sure, I think we'll go first to Tony and do Adiana and then we'll move over to Rob.

It is Tony. Probably early to talk a lot about Adiana. We did get CE market approval at the end of calendar 2008. We have now shipped product commercially, and cases will begin I believe this week or next week. We have targeted a very limited number of European markets at the outset. From a revenue standpoint, that's not particularly material this year, but we're excited because it gives us the opportunity to test out our systems and get the product in the customers' hands. So it is early days on that but it looks encouraging.

Relative to mammography and tomosynthesis in Europe, Rob, do you want to handle that?

Sure. We have pretty broad interest. I think the market is moving into the segment which are early adopters, university, high level sites that are using this in many different ways from an experimental perspective. And we are in the process of really trying to get a much better scope in terms of how to now refine that so that we can have a standard protocol developed for the European user. We think that that will happen over the next six months, and that will also open up the opportunity for broader adoption.

I would add to that, and that is that in my travels in some of the tomosynthesis sites that we sold, they're also private sites here, and these are prestigious sites that cater to the private pay market, and they want to be technology leaders. So the product is going in there. It is being used initially in the diagnostic mode, and then as people become (inaudible) we'll be moving into a screening mode. So it is really in both sectors. The private market internationally is larger than most people think, and there are some sites in every country that cater directly to those type of individuals, so that has been a target for us.

Great.

Thanks. Just in terms of your guidance, and your international Selenia business, when you issued the remainder of fiscal '09 Breast Health division guidance, do you incorporate expectations for your international business to show growth or where were you with that?

Yes, we did. In terms of the numbers that were given by Glenn today, that assumes the moderate growth we discussed earlier relative to international. The issue is that it represents a relatively small amount of overall sales today. That may change over time, but so that a growth certainly did not over shadow the decline of our domestic business.

Great. Thanks.

Thank you.

Next we'll hear from Jayson Bedford with Raymond James.

Good afternoon. I may have missed this, but did you give us Selenia unit number in the quarter?

No, we did not.

No, Jason, we didn't.

Okay. Just in terms of, obviously you guys have the number, I am wondering if you guys are confident that you didn't lose share in the quarter?

We are certain we didn't lose share.

And then just the digital business, maybe on a percentage basis, how many units are replacing existing digital versus replacing analog?

Well, obviously there is limited information on that. In our original thoughts when looking at this year, this fiscal year, we thought the market in the US would be somewhere in the area of 250 to 300 units of all of those sold would be replacements of older digital units. That may change as a result of people holding onto equipment longer because of some of the dynamics of the market that we earlier discussed, but that was our thought process relative to used equipment or replacement systems being sold, I should say.

Okay. Thank you.

Thank you, Jayson.

Our next question is from Keay Nakae with Collins Stewart.

Question about the Diagnostics business, in particularly Cytyc. Are you losing share to your primary competitor in either the US or O US? And if so, why?

Well, we keep reading we are, so we would like to know exactly where that is, but I would like to have Howard answer that question.

It is a fair question. I think part of the answer is just going back to what I said earlier. Again, if you look at our annual volumes of ThinPrep pap test filter sales over the last five to six years, they have varied not necessarily sequentially up and sequentially down, but they have varied between about 1 million test differential from the high and the low. 2008 was within that range. We had a strong Q1 that put us within that range, and what we have seen thus far this quarter does not give us any indication that things are dramatically changing. So I would say that our sales have been very steady and they have been steady now for six plus years.

Internationally our sales continue to go up. Two factors for Diagnostics have driven the majority of the revenue growth over the last few years. That has been imager adoption in the US and ThinPrep volume increases in international, and those volumes continue to increase.

Second question regarding your backlog of Selenia sales. Are you seeing products come out? Or give us the nature of how you qualify backlog? Are these things that you're simply manufacturing and ready to ship or are you seeing orders actually being canceled or simply delayed?

We have had new order delays, but a unit in backlog has not been canceled. We have had some delayed installations, but very few, and the predominant factor in terms of revenue shortfall has been a delay in the placement of a new order. So, no, we believe our backlog is sound.

And a backlog is a valid order. It is not a product that's been manufactured that's sitting on the floor. That's inventory.

Okay. Thank you.

Next we have a follow-up from David Lewis.

Good afternoon. Glenn, you have been surprisingly quiet. I wanted to talk about EPS. So given the new revenue guidance, what is your sense of are you basically saying that's (inaudible ) provided a back stop and you can control around that number regardless of what happens on the top line? And how much flexibility do we have in the bottom given changes in the top?

David, there is some flexibility. I think we have shown that in Q1 by taking certain cost savings steps in order to protect earnings, even with the decreased down to $4.29 which was, what, about 13, $14 million short of what our guidance was. If we look out for the remainder of the year, the steps that we had to take were much more drastic. I don't want to belabor it, but the current guidance at 16 or I am sorry, 1.625 and 1.675 is approximately $200 million short on the revenue side than the guidance from last November, and that is why we took a heavy hand looking at expenses, freezing hires, the workflow reduction, and made a lot of the initial moves to protect where we think we can get to which is reflected in the current $1.10 to $1.15. If our revenue were to be softer than our current guidance, we would have to take further steps, but within that range I think we're comfortable that we took the steps to get to that lower EPS and we feel comfortable with that as being a back stop.

Okay. And sorry to belabor this point, but after the March quarter, are you forecasting that revenue for Breast Health would be down sequentially or could be flat sequentially? Because our quick math here assumes that you're going to see a down sequential trend past that next quarter.

No, no, if we look out into Q3 and Q4, the business on Breast Health is essentially flat.

Okay. So it would trough out next quarter. Okay. Lastly, Jack, just on tomotherapy things you have seen overseas what have we learned in terms of placing tomosynthesis overseas versus what you think you would see in the US marketplace in terms of the kind of hospital that had adopted the technology and the specific feedback we've gotten? Thank you.

Yes. I think that to categorize the European market predominantly it is a market that is very dose sensitive. So the adoption of tomosynthesis and the use of it clinically really mirrors their preoccupation with dose, meaning that instead of using both 2D and 3D together, they might use only one view of 2D and multiple views of 3D, or 3D as a stand alone. So what we are doing now is looking at a way that we can standardize the protocol of how the product is used for the European markets specifically, and as I said earlier, that will happen over the next six months. We're training a little market intelligence on our part in terms of spending much more time with our users, but it will be a much lengthier process. But, again, very encouraging in that they're using the product, they're not afraid to use the product, and in fact we're finding that there are strong clinical benefits to using the product. It is just being used differently from country to country at this point.

I would add, Rob, that I just came back and visited a site where it was most interesting in that they had this protocol that said if it was a new patient, they would do the 2D plus 3D. If it was an existing patient that had had no prior test that had any anomalies, they would do the 2D only, and if they saw something, then they would go and do a 3D study. And if somebody was a high risk patient, they would do 3D, and that's what their protocols were.

There are no further questions in the queue. I would like to turn the call back to Mr. Jack Cumming for any closing comments.

We thank everybody for tuning in at this late hour, wish you all well, and much success, an economy that would recover, a recession that will end faster, and a recovery that will happen faster. So with that, I look forward to speaking with you personally over the course of the next several months and our next conference call. Thanks so much. Have a good night.

And once again, that does conclude our conference call for today. We thank you for your participation. Have a great day.