Hologic Inc (HOLX) 2009 Q3 法說會逐字稿

Good afternoon, and welcome to the Hologic, Inc. third quarter fiscal 2009 earnings conference call. I am your operator for today's call. Today's conference is being recorded. All lines have been placed on mute. I would now like to turn -- introduce Deborah Gordon Vice President Investor Relations to begin the call.

Thank you. Good afternoon, and thank you for joining us for Hologic's third-quarter fiscal 2009 earnings conference call. I encourage everyone to visit Hologic's industrial 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 third-quarter results as well as our fourth-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 lake to remind you of our Safe Harbor statement. Certain statements made by management of Hologic, Inc. during the course 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 achievement expressed or implied by such forward-looking statements.

Such factors include among others those detailed from time to time in the Company's filings with the Securities and Exchange Commission. We expressly disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement 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 third-quarter 2009 earning release including the financial tables in that release.

Please note that today's conference call will consist of approximately 30 minutes of opening remarks by 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.

Well, thank you very much, Deb, and good afternoon, everybody. And thank you for attending our third-quarter fiscal '09 conference call. Joining me on the call is Rob Cascella, our President and COO, and Glenn Muir, our Executive VP and CFO. Also joining us today are Tony Klingsley, Head of our Surgical Group, and Howard Doran, who leads our Diagnostics Group. Both will be available during the question-and-answer session.

I will start the proceedings with an overview of our business performance in the recently completed quarter. Next Glenn will discuss the financial results. And our guidance for the balance of fiscal '09. We will then open up the call for Q&A. As Deb stated we'll conclude the call in an hour out of respect for everybody's time.

I'm pleased to report revenues and earnings exceeded our guidance in the third quarter as stated in our press release, Q3 FY '09 revenues totaled $403 million, a 6% decrease from the third quarter of fiscal '08 but ahead of our guidance of $390 million to $400 million. The better than expected performance was attributable to solid sales in our GYN Surgical and Diagnostic businesses as well as strong reoccurring service revenues offset by the anticipated softness in our digital digital mammography, capital equipment business.

While the economy continues to constrain hospital capital equipment budgets, our consumables product lines were only modestly impacted by the overall economic environment and rising unemployment rates. When factoring in our recurring revenue stream from service, these combined revenues represented approximately 70% of our consolidated revenues for Q3. Within diagnostics, Third Way performed above expectations due to strong sales across the board. The launches of both Cervista HPVHR and Cervista 16/18 resulted in a solid start with good lab penetration and considerable customer interest. Although the approval of the Adiana permanent contraceptive system came subsequent to end of our third fiscal quarter it represents another encouraging event in addition to the positive quarterly results.

For the third quarter of fiscal '09 our non-GAAP earnings per diluted share were $0.29, beating our guidance of $0.25 cents to $0.27. This compares to our non-GAAP EPS of $0.33 for the same period last year. Before reviewing revenues by segment, let me comment briefly on the economy and our current outlook. The hospital capital equipment spending environment in the US remains difficult, and we see continuing budget constraints through the end of our fiscal year and well into 2010. The demand for capital equipment outside the US is also under pressure as governments are facing similar economic challenges. However, because Hologic's revenues are diversified well beyond capital equipment into more recession-resilient, higher margin disposable products and because the Company has strong recurring revenues from service, we have been able to preserve profitability. And, in fact, outperform expectations even under difficult economic conditions.

As we also noted last quarter, these results continue to provide confirmation, our overall earnings are not as sensitive as they once were to weakened capital equipment demand. I would now like to take a minute to briefly provide the third-quarter revenue overview by segment. (Inaudible) revenues were $175 million, down 20% from the $219.5 million we posted for the same period in fiscal '08. This decrease was due to the slowdown in Selenia system demand but importantly was somewhat offset once again by solid growth in service revenues related to our Selenia full field digital mammography systems as we continue to expand our installed base. And speaking of our full-field digital mammography systems, we believe we continue to maintain greater than a 60% market share in digital mammography in the US. In addition, our interventional breast health business performed well again this quarter. Revenues from our breast biopsy systems including the new Eviva breast biopsy system launched in the second quarter performed quite well and contributed gains to our top line.

Diagnostic revenues totaled $139.5 million and increased 10% compared to $127 million for the same period in fiscal '08. On a worldwide basis, ThinPrep Pap Test sales were up slightly paced by international growth and tempered modestly by a slight decline domestically. It is noteworthy to mention we achieved a record level of Thinprep units sold on a worldwide basis in the quarter. Amateur adoption continued to increase in the US with improvement in the percentage of Thinprep test image including image tests performed by our two largest laboratory customers. Outside the US, European and Asian markets were particularly robust. The slightly better than expected performance in diagnostics can also be attributed to strength in Third Wave's product portfolio.

Cervista products began to contribute revenues both domestically and internationally in the third quarter, though moderately as new customers must go through a validation process before we begin to realize revenue. The good news is interest in the Cervista products is high on the part of physicians and labs and revenues will become more meaningful next fiscal year as sales efforts continue to gain traction. GYN Surgical services totaled $65.8 million and increased 17% compared to Q3 of FY '08. Sales improved $2 million sequentially and all of the growth is attributed to Novasure procedure volume. Adoption of the Novasure System as an office based procedure continues to remain a focus and we are pleased with the growth in the percentage of our business from monthly standing orders. The surgical business was modestly impacted by the current economic conditions with a larger number of women deferring their wellness visits to OB-GYNs.

Last quarter we launched our Adiana system in select European countries on a very limited basis. Revenues in the third quarter were minimal. As the Adiana system was approved in the US July 6, it did not contribute any revenues to the most recently completed June quarter. Skeletal health revenues totaled $23 million compared to $27 million in the same period fiscal '08 and flat sequentially. Our worldwide bone densitometry and MRI sales were again affected by the weakness in hospital capital equipment spending which was expected.

As for new products regarding Cervista HPV HR, we commenced our formal launch of the test in mid April. So this was our first full quarter of US sales. We also launched Cervista 16/18 this quarter. I'm happy to report considerable positive feedback and interest from the physician and laboratory communities. With both tests highlighted by several new contracts. As we mentioned last quarter, there's a period of approximately one to two quarters between contract signing and recognition of Cervista revenues due to the installation of equipment and the validation processes necessary to begin running the test. Therefore, as we projected, Cervista revenues will be minimal in FY 2009 and should become more meaningful in fiscal 2010. Bottom line, the initial response has been uniformly positive, and we are very encouraged about the growth prospects of Cervista HPV HR and longer term for Cervista 16/18.

On July 7 of '09, we announced the FDA approval of our PMA applicator for Adiana system. This marks Hologic's entry into the permanent contraception market and provides women with a minimally innovative, nonincision alternative to the traditional surgical approach of sterilization. We're beginning to introduce Adiana to the market and are registering physicians for training along with other launch and marketing efforts. We are focused on executing high-quality training, as we have previously communicated to you. We expect revenues be minimal in FY 2009 and to become more meaningful in FY 2010 as our ramp-up accelerates. Regarding homosynthesis, as you may remember from our conference call and earnings release last quarter we have postponed our panel meeting with the FDA and are proceeding down a few distinct pathways. As you may recall we feel this is appropriate for several reasons such as to augment our clinical information, to allow some of the dust to settle within the FDA, and to work in tandem on reimbursement required and to ultimately strengthen the technologies position in the marketplace.

On our second-quarter call we provided a number of details around our specific plans and anticipated timeframes. Since then, there have been no material developments or changes to these plans. Therefore, we refer you back to that call as we do not plan to provide details on interim progress which is consistent with Company practice regarding ongoing clinical trials.

In summary, despite continued challenges faced by our capital equipment businesses, we are pleased with this quarter's performance both in terms of the top line, particularly with our disposable businesses, and recurring service revenues and in terms of our profitability. All of which have enabled us to succeed and exceed our earnings guidance. In addition, we continue to post the kind of strong cash flows and debt reduction trends that have been a hallmark of Hologic. Given the favorable early response to our two new Cervista HPV tests as well as to our recently approved Adiana system coupled with our solid financial position and product pipeline, Hologic remains a focused and operationally efficient Company, well positioned for the long term. With that I'd like to turn the call over to Glenn to provide the financial details and guidance for the balance of fiscal 2009. Glenn?

Thanks, Jack. Jack briefly addressed our third-quarter revenue performance by segment. Let me note that our mix of domestic and international sales was approximately 80% and 20%. Relatively consistent with historical trends. Foreign currency translation had a modest impact on our reported revenue growth. 1% year over year, primarily within the diagnostics and surgical segments. As most of these international sales are denominated in local currency.

Turning to the rest of the P&L, our gross margins on a non-GAAP basis held steady at 62.5%, consistent with the second quarter. This excludes $40.5 million of amortization of intangibles and is just above our guidance range of 61% to 62%. This improvement compared to our guidance was due primarily to, first, a product mix favoring higher margin products such as the Thinprep Pap Test and the Novasure system. And second, lower manufacturing, product, and service-related costs. On a GAAP basis gross margins were 52.4% versus the 52% we guided to.

We maintained our focus on cost savings initiatives in order to reduce discretionary expenses, resulting once again in a favorable outcome. Our operating expenses on a non-GAAP basis of $119.4 million excluding amortization intangibles of approximately $13 million came in below our second-quarter expenses and also below our guidance of $126 million to $128 million. Further, when compared to last year, our operating expenses excluding the amortization intangibles and the added expenses of third wave which didn't exist last year decreased almost $16 million this quarter on a comparable basis.

Absent the acquisition-related charges, pretax earnings this quarter were $114.4 million. Using our effective tax rate at 34.5%, non-GAAP net income was $74.9 million versus non-GAAP net income of $84.9 million last year, a decrease of 11.8%. We reported fully diluted non-GAAP EPS this quarter of $0.29, versus $0.33 a year ago, which was ahead of the guidance of $0.25 to $0.27 we provided on our last earning call. This adjusted EPS includes the operations of third wave, which equates to a $0.03 per-share after-tax loss, also in line with our expectations. As noted in our press release, our total dollar backlog for all our protect was $334 million at the end of June. Down slightly from $339 million at the end of March.

Turning to the balance sheet. During the third quarter we repaid $107 million on our $540 million term loan which was borrowed on July 17 of last year in connection with our acquisition of third wave. Thus, we have repaid a total of $270 million of the term loan, leaving a balance of $270 million at the end of the June quarter. As of today, our balance has been further reduced by another $56 million to $214 million. Our strong cash flows will enable us to pay off this loan within the 2.5 years we originally guided to. We generated in excess of $135 million of free cash flow in the third quarter, comprised of approximately $150 million of cash flows from operations less capital expenditures of $15 million.

Moving on to guidance. Let me first start with the fiscal year and then cover the fourth quarter. With three quarters of the year behind us, we are tightening our guidance ranges for the full year. For fiscal 2009, which ends on September 26, we are increasing the earnings guidance and tightening the revenue range that we provided on the second-quarter call on May 4. The details of which can be found in last quarter's press release and IR presentation posted on our website.

By way of brief reminder, we stated that we expect, one, that breast health revenues to be down for fiscal 2009, driven by the substantial softness in Selenia sales, and, two, diagnostics and GYN Surgical revenues continue to trend up for the year due to increased imager adoption, higher international sales, and more widespread use of the Novasure system. In addition, our service revenues, primarily relating to our install base of Selenia digital mammography systems, continued to increase our recurring revenue stream. Therefore, our high-level guidance is as follows.

We are tightening our target range for total revenues to $1.625 billion to $1.635 billion. Our revenue guidance at this point includes US sales of both Cervista HPV and Adiana products, realizing we will only get a modest contribution from these products in the current fiscal year. We still expect to see meaningful revenue traction from these new products in fiscal 2010. For tomosynthesis we continue to expect only international sales for at least the next year. We are looking for a full year gross margins of approximately 61.5 to 62.5% on a non-GAAP basis. We're expecting operating expenses in the range of $487 million to $491 million, excluding the amortization and writeoff of intangibles. We are expecting interest expense based on current LIBOR rates to be approximately $70 million, and our effective tax rate absent impairment charges is expected to be 34.5%. And we are increasing our guidance for non-GAAP adjusted EPS, and now expect it to be $1.14 to $1.16 per share. This includes the full-year results of third wave, including a minimal US contribution for Cervista and Adiana product sales. 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.

Next, our guidance for Q4 remains consistent with the guidance provided at the last conference call, and result in revenues and earnings coming in just under the current third quarter, reflecting a slight slowdown based on the seasonality we usually see in the summer. For the fourth quarter of fiscal '09 ending September 26, we are expecting revenues in the range of $390 million to $400 million. Revenues are driven by two primary factors. First, our continued conservatism with regard to the economic uncertainty affecting our hospital customers' purchases of capital equipment. Namely, Selenia systems, biopsy tables, and skeletal diagnostic equipment. And second, partially offset by continued growth in our diagnostics and GYN Surgical segments as well as growth in our service revenues. This growth is expected to be a bit slower than other quarters because our diagnostics and GYN Surgical sales are typically impacted in the fourth quarter by seasonality both internationally from customer vacations and in the US as office visits generally trend downward during the summer. We expect gross margins to decrease slightly with the just-ended third quarter to 61% to 62% on a non-GAAP basis.

We expect operating expenses excluding the amortization of intangibles to rise slightly on a sequential basis to $122 million to $126 million or 30% to 32% of revenue. Primarily as a result of increased sales and marketing costs related to our three recently approved products and to a lesser extent slightly increased R&D costs. We expect interest expense based on current LIBOR rates to be approximately $17 million in Q4, and our effective tax rate is expected to be 34.5%. We expect non-GAAP EPS excluding the amortization intangibles of approximately $0.25 to $0.27 per diluted share. This includes the results of Third Wave which are expected to be dilutive to adjusted EPS by $0.03.

In fiscal 2009, we have had strong cash flows and we will not require any financing to fund our operations. We expect to generate over $100 million of free cash flow in the final quarter of the year, 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 close to $60 million and depreciation of approximately $70 million for the year. With that, let me now turn the call back to Jack.

Thank you very much, Glenn. In closing, we continue to manage our business mindful of the challenges the global economy still presents to our capital equipment businesses, and to a smaller extent our overall business, but we're doing so prudently and thoughtfully in order to position the Company securely for long-term growth and profitability. The recurring revenues from our disposables product lines and our service contracts remain strong and represent a larger percentage of our overall business as they continue to add nicely to both our top and our bottom lines. Overall, I'm pleased we exceeded our revenues and earnings forecast and delivered on our commitment to continue the cost-savings initiatives we implemented in the first quarter.

Our management team has done a superb job not only implementing our cost-saving initiatives early in the year, but maintaining costs at target at levels without negatively impacting our current or our future revenue streams. Our product pipeline remains strong. Evidenced by the three products that have received FDA approval this year. And the positive feedback on the products both of Cervista HPV HR and the 16/18 products and our new Adiana systems.

So as always, our goal is to achieve and maintain our leadership in all of the major markets we serve. And remain committed to put our customers first and maintain our number-one position in women's health. And as always, I would be very remiss if I didn't thank our worldwide team of Hologic associates for their continued commitment which is clearly the foundation of our current and our future successes. This now concludes our opening remarks. Glenn, Rob, Tony, and I, and Howard will be happy to answer any of your questions and in order for us to allow as many as investors as possible to ask questions during this last 30 some odd minutes I remind you to please observe Deb Gordon's earlier request that you limit your questions to one with a follow up question as necessary. With that please open up the call to Q&A.

Thank you. (Operator Instructions) Our first question comes from Amit Bhalla from Citi.

Hi, good afternoon. I wanted to start with a question just about guidance. You've mentioned a couple times that for fiscal 2010 you're looking for more meaningful contributions from some of the new products that you've had approvals on. I was hoping you could maybe just step back and maybe give us some qualitative thoughts on the overall business top and bottom line for 2010. Not necessarily specific guidance but just, maybe give us an idea of where you think growth rates might shake out?

I know you're not asking for guidance, Amit. Because, I know you would never do that. Well, let me -- I'll ask Rob to talk in broad terms because obviously we're not going to go through guidance. Plus the fact is, as all of you guys know, we go through the budgeting process right now, and we make our presentations to our Board in September. So everything clearly is not fine-tuned. We certainly -- and I want to refer back to the fact is that we're still facing a very tough economy. Even with the prognostications in the paper about things are getting better, it's going to start happening at the end of this fiscal year, the fact that we're out of a recession doesn't mean that the recovery is going to be a hockey stick. It is going to be a very, very slow recovery. At least that is my belief. And hospitals I think are going to still be severely constrained. So with that, let me turn it to Rob and see if he want to add a lid more color to that.

Yes, thanks, Jack. Really we are in the process as we speak of putting together our planning and budgeting for the next year. So it's a little bit premature to try to speak to even trends for next year other than that we are certainly expecting the businesses that did well this year will continue to do well. We're very cautious about our capital equipment business and will -- we will certainly manage that from a profitability perspective more than anything else in term of revenues. So without being evasive about it, the preference would be that we defer until our fourth-quarter call, to really talk in more comprehensive way about 2010.

Okay. And just my follow up would be, any comments in terms of the economic weakness on procedure volumes affecting your disposables business? And second, GE has their new mammography manufacturing facility up and running in New York. Are you seeing any sort of impact on their ability to now deliver products to customers faster? Thanks.

Yes. I think we continue to believe that the disposable portions of our business tend to be more resilient. I think clearly there is a dropoff in OB-GYN visits of recent and let's say that that's something less than 10%. We haven't really seen yet the effects of that in a material or meaningful way. But expect that if this were to continue, there will be an emphasis on acute care rather than wellness. So women may in fact skip their annual exams both for pap or for breast cancer or otherwise. As far the G factory we haven't really seen any changes in their methods of selling or anything that they've used to leverage the presence of the factory. So irrespective of where they build it, whether it's here or in France, I think that they'll always be strong competitors, and we'll manage that process like we have from the onset.

Thanks.

Sure.

Thank you, Amit.

Our next question comes from Amit Hazen from Oppenheimer.

Hey, good afternoon, guys. Maybe I'll start with HPV. If you can give us an update from a couple of respects. First, just maybe a little bit of color on the types of labs that you're seeing interest from I guess maybe from a volume perspective. And what your marketing message really is to these people now as it relates to Pap testing intervals now that you're marketing HPV as well. And then just an update on your automated platform for HPV?

Well, Howard, would you field that, please?

Sure. Thanks, Amit. First of all in your first question about volumes, we discussed on the last quarterly call where we stood today with our platform of what we call now semi automated. What we communicated at the time is what's important to the laboratories is the amount of FTE's that they utilize to complete one batch of HPV tests. I would suggest to you again that our current situation is competitive or equivalent to the Rapid Capture system that Cryogen has to offer. We feel we can compete really today in any buying laboratory.

With that being said, I'll jump to your third question which is an update on automation. We had given a timeframe on last quarter's call. We are certainly on track to meet that, and what we are doing is automating more pieces of the process right from the vial all the way to reporting out an end result. We have shared this development undertaking with many customers. They're excited about it. We are already looking at things beyond that to make it even better. And I think what really makes us different than the other vendors that are going to be in the marketplace is, we are looking at the synergies and the combination of all of our equipment, pap and HPV. I think that makes us very different because we're looking at the lab work flow in its totality, not just on the pap side or not just on the HPV side. We're getting fabulous feedback from those that we're sharing this information with. Again, sharing the development work that we're doing, and are we heading in the right direct and the feedback has been very, very favorable. So I would suggest to you that we can compete in any size lab today, and we expect we can be a stronger present in the future.

When you talk about the marketing message, we're spending the the majority of our time on two areas. Talking to the OB-GYN of what the benefit of Cervista is. What's in it for them. Lower QNS is important to them. Less gray zone results is important to them. They like the idea of a negative control for accuracy et cetera, but secondarily, to that we have always positioned ourselves to be the educator on cervical cancer screening. What I mean by that is, we have always gone out and talked about the merits of our product, but also the proper use of them and walking clinicians through their various choices as it comes to cervical cancer screenings. We have always talked about guidelines, age, appropriate screening, and frankly interval.

I would say there's two things that are affecting volume in the US today. Certainly the one that Rob just talked about. There was a Gallup poll just back in May that talked about office visits for annual exams being down about 14%. We certainly have not seen that kind of falloff in our volumes, but we've seen some modest impact. I would suggest to you that's the majority of it is. Most of our laboratories when you start talking about are you seeing interval expansion to any extent, typically say not really. They're seeing lower volumes predicated more on the economy. We have done a lot of surveying of women, and the annual visit is extremely important to them, so is the annual pap. We just don't see doctors arguing back and pushing back on patients that come in and ask for the pap to be done on a routine basis. As a matter of fact, 26 states still require access to an annual pap for all women within those states. I would say if we're seeing interval change today, it's extremely modest. Frankly, I don't see it changing that dramatically in the future. Amit. I mean, it would be -- it would be wrong to say it's having zero impact. That's definitely not the answer. But is it having huge material impact. I would suggest to you that it's not.

Great. That's very helpful. One followup maybe on digital mammography and the bigger picture question on the US market. Understanding the capital equipment environment, just curious kind of your longer term thoughts if we think back to '07 there were about 1,800 digital units installed in the US. If you go back to '08 there were about 2,200. If we look at '09 it looks like it's about 1,500 to 1,600 units that will be installed. How do we think about that going forward? I know there's a big delta with the CapEx tightening but is it something that's going to roll back toward the 2000 level or are we going to be trending toward the 1,000 level from here?

Yes. I think that we -- we'll yet back to a normal market relative to growth at some point. I don't believe that will be 2010. I think it will be slow in coming. In terms of overall penetration, when we look at the market we think that it's not going to be 13,000 pieces of equipment or 12,000, but it certainly can be 9,000 or 10,000 pieces of digital equipment. The real difference will not be units, it will end up being much about ASPs. And the category of where those units fall. And they typically will fall into the lower end ASPs, the bright note will be that there will also be a replacement market. And typically the replacement market will be those that have already owned digital and they'll be buying higher end product just like the original adopters of digital did. Which these individuals are customers are, in fact. So it will be a mix of penetration of those that have not converted as of yet at the low -- been converted as of yet tees low end and the replacement of older individuals at the mid-to-upper tier. I think we'll have a a balancing of ASPs as well over the next 2010 and 2011 as well.

Okay. Thanks very much.

Our next question comes from Isaac Ro from Leerink Swann.

Thanks for taking the question. I know you guys don't want to talk about Tomo, but can I take it to mean that there has been no new dialogue with FDA and if so, was that sort of expected on your end? Then secondly, can you comment on how the European launch is going for Tomo?

Sure, Isaac. First of all, we are always in conversation with the FDA. So it is not that -- it is that there's nothing material to really relate to you or to the market. But we are -- we are in conversations with them on a routine basis about Tomo and other subjects. Rob, do you want to talk about Europe? You or I? Go ahead.

Sure, Jack. The European market when we looked at that for any new technology, if was always assumed and expected that they are slow to adopt. There is specific in-country registration processes that allow the public sector to then buy any new modality or new type of technology. We are seeing that trend occurring today. Where we are selling Tomo tends to be in the private sector and in somewhat more of a university or research type of customer base. So it is -- it is slower in terms of adoption and in fact we are meeting what we believed to be our original O-US expectations for the product.

Great. Then just secondly, thinking about your operating expenses, they've declined on a dollar bases the last four quarters here. Just wondering how much more wiggle room there might be as you try to tighten up the operation. Specifically thinking about the facility in Costa Rica. For the consumables. Just wondering where you are in the process of transitioning everything down there and if there are any incremental cost reduction opportunities in skeletal health.

Isaac, it's Glenn. I think as it relates to cost savings. I think we made a lot of progress this fiscal year. I would have to say that there's probably a little more for Q4 or going into FY 2010 unless we felt the was a significant downturn in the business and then we'd have to take a hard look at it. So I think we've made the progress that we've wanted to make. The facility in Costa Rica is going to be important as we go forward. The -- the facility itself is four times as big as the facility -- the old facility we had down there. And today, it's manufacturing the Novasure line, the Adiana is just ramping up down there. So it is going to begin to show improvement over time as more product is manufactured out of there. That probably won't happen until later in the fiscal 210 timeframe. It won't happen early on.

We will take a question now from David Lewis from Morgan Stanley.

Hi, there is actually James Francis filling in for David.

Hey, James.

Hey. What can you tell us about HPV penetration versus your expectation and in particular could you comment a little bit on success you have in genotyping as a way of providing market share?

We'll let Howard do that. I think it's a little bit early to talk about our success. Like one game and have have good at battles and then find out you got he rest of the season to play, too. Of cours, we have got a very strong competitor. Howard?

Yes, James. I won't say anything in addition to Jack other than we are very pleased with the progress we're making. We continue to sign new agreements with laboratories. Jack had alluded in his comments, it takes 60 to 90 days to get those folks through validations up live and running. We're very pleased with the progress on those that are in the funnel and those that are starting to report real results. As far as 16/18, certainly having that as a key differentiator is important. It's particularly important to the lab who was trying to differentiate themselves in the marketplace, as well. They really like adding 16/18 top their offering because there's more labs that don't have genotyping available today than have it. And they really view it as a market differentiator for them which is having many folks call u to have more serious conversations about utilizing it.

Okay. Secondly, what could you tell us about your commercialization strategy for Adiana, particularly in relation to the market opportunity for Novasure?

Tony has been waiting this whole call to give that answer, so, Tony.

Yes. Thanks, James. We are targeting with Adiana obviously, procedurally oriented GYNs and particularly those who are either in office or want to move in office. So their is a almost complete overlap with the Novasure customer base. It's the same salesforce and it's really going at the same customers. In terms of targeting the two together to the extent it makes sense for our customers. We'll we'll obviously do things like align -- contracting terms with that but we think each product stands on its own economically. We'll do that on a mechanical basis where it makes sense. We obviously think there's a ton of leverage in the salesforce and that subset of GYNs that were very procedurally oriented.

Great. Thank you.

We'll now go to Tycho Peterson from JPMorgan.

Hey, thanks for taking the call. Question actually, Tony, on that topic. I'm just wondering if you could talk a little bit about where you think we are from a mix for Novasure in terms of in-office penetration today? If you can comment on inventory levels. Then any sort of share safe issues. And whether you think you need a deed to see effort for Adiana, as well?

Okay. So I think -- we're very comfortable from an inventory standpoint. We think the strength of the business in the recent quarter is -- reflects fundamental underlying demand. We obviously had an up quarter as it typically is seasonally. But I would say we're very comfortable on that front. We're continue not to see any significant share shifting versus the competition. We are still continuing to win people away from the competitive technology. I know that Thermachoice has had a greater sales effort out there lately. They've had the orthorest and things. We haven't seen a big dent from that especially on a systematic basis. I think we're still pretty confident on that front. From the TC standpoint on Adiana, our perspective is that's probably not appropriate right now. We are focused very much now on leveraging the field for us, getting the product into the hands of physicians. I think that's something we might think about in the future. But I don't think it makes sense for it to be a significant piece of the market. We will obviously offer our physicians appropriate patient education materials and things like that because we have website we have search, all that kind of stuff, but I think a broader campaign wouldn't make sense at this point.

Okay. That's helpful. Maybe one-for-Rob on Tomo in Europe, appreciate the color you provided before. Can you talk a little bit about how the protocols are shaping up. I think you talked in the past about not a lack consensus around how it's been utilized but just the kind of wide range. Can you talk a little bit in terms of practical applications, how people are using it, 2D versus 3D, stand alone versus follow on (inaudible)?

Sure. What we're finding, Tycho, is there is a -- clearly the initial utilization of the product is diagnostic and the application tends to be that the physician is part of the diagnostic workup. There's a bit more standardization as we do more education and training there, as well. And the goal is to really try to use it or promote the use internationally to replace various spot views, maybe a spot compression, a lateral view. Things that in fact are very time consuming and very painful for the woman to endure. So as a result of that there seems to be good consensus that those are -- those are helpful applications for Tomo in diagnostic.

Having said that, we are still seeing that there are some of our radiologists, o-US, they are very comfortable with using a combination imaging in diagnostic meaning the combination of 2D and 3D, and we are also seeing some that are only using 3D as a complement to typical 2D diagnostic views. In that respect there is still some variation in terms of the applications. But I believe that what we will find as we do more education and there are more units that are installed is that we will fine tune the indications for use and the protocol for Tomo o-US and that will also be pretty helpful for the US market over the near to midterm term, as well.

That's helpful. Thank you very much.

Our next question comes from [Bill Cork] from Piper Jaffray.

Thanks. Good afternoon. Jack, just -- thanks for the commentary around Tomo and obviously a couple of questions have been asked. Just to I guess throw another one out in the mix here, should we read that you do remain comfortable with both the original timeframe that you threw out last quarter as well as you will not need additional clinical trial to go after the broad screening claim? I'm trying to parcel your comments here a little better.

Okay. How to answer that? I think that the -- and I guess I recollect we had said that we felt it was going to certainly take at least 12 months to get an approval from the FDA. And I would certainly still stand by 12 months -- at least 12 months from now if not longer. So you don't misinterpret the, If not longer," t is -- it's still unknown on the FDA. They're still a little bit of house cleaning -- not house cleaning, rearranging the chairs so to speak, there. We will be prepared certainly with a filing that we believe should be give them sufficient time to get this all handled within a 12-month period of time. That being said, I think a -- we've gone in with the screening one on our initial one. We're certainly going do be doing more work on an ongoing assist for the larger population for a screening. Not that it was half of us, but we realized we think it should be done for some of the indications that we want to look at with our product and some of the upgrades to our product. That being said, I think that we'll have an initial approval, more probably on the diagnostic side followed by a screening one. But I'll let Rob offer up his opinion on that.

All right. I'll just close really quickly. What we originally said was that we were going down three paths and we are still on those three paths. One to the narrowest of indications meaning a diagnostic protocol to a new screening submission. Yes, that screening submission will require new clinical data, and we are in the process of aggregating our beta sites which we have 15 of them in the field, to do just that. So the original plan has not changed. The timelines have not. And again, we are -- we're on a path to achieve all of those because we think there will be a variety of different applications and indications for Tomo in the market.

Very good. Thank you. One followup. Howard, throw this one out to you. On the HPV side -- thanks for the color on the U.S. instrument reduction. What should we be thinking about in terms of the European instrument launch, spring 2010, a good number to use?

Are you talking about for instrumentation?

That's correct.

Yes. Instrumentation should be, follow very similar to the US launch.

So call it mid-2010 then?

Yes.

Okay, very good. Thanks, guys.

Thank you.

Our next question comes from Peter Bye from Jefferies and Company.

Hey, thanks. Just a couple cleanups. Glenn, I think on the call you mentioned that the upticks sequentially would be sales and marketing related. And just in the handout, it mentions it's the timing of R&D. I assume maybe it's a combination or is this one a misprint?

No, it is a combination of both, Peter. It's the sales and marketing side as we focus on the launch with Cervista and Adiana. Also it does include R&D to the extent that we move forward with some of these clinical trials on the R&D side with tomosynthesis. It's really both of those pieces. But I -- I don't want to infer it's a huge increase, though. The Q4 even though we are estimating and projecting it's really a slight increase in operating expenses. Those are the two areas that it would come, it would hit. Maybe just a few million up in the Q4 quarter for operating expenses.

But on a dollar basis, it's -- tomo trials will take a bit and I assume you want to put muscle behind the launches. You're probably talking about just on an absolute dollar level, more of a sustained uptick from fiscal Q3 or not? I don't want to put words in your mouth either.

No. It would be sustained. Your point is that especially the R&D on tomo is stretched out over a period of time. It doesn't come in any one quarter. And that in fact is correct. But even the marketing and sales launches for Cervista and Adiana, I don't want to overplay how bit it might be because we do have the salesforce in the field today. So there's a lot of leverage that we have products that we're selling out there today that that we're piggybacking on. So there is a modest increase in -- in total when we think about the operating expenses.

Okay. Great. And I might have missed it. Steve, the interest expense, up sequentially. You're paying down debt. What, -- is that -- was there other in there that was a little bit of an uptick or no other expense--?

The interest expense is just interest expense, but I must say the largest part of that amount is actually the amortization of the deferred financing costs as we've accelerated the repayment especially of the term loan. More amortization or deferred financing. There is actual interest expense. So it will be nice to get rid of that line item altogether.

Okay. That--.

Moving on we'll go to Jayson Bedford from Raymond James.

Good evening, guys. A couple quick ones. Maybe for Tony on Novasure, I realize it's been some easy comps here. But the growth is quite strong. I'm guessing it's not due to more controllers out there and is more related to higher utilization in the office. Is that the sole reason for the growth, or are you seeing strength outside the US?

Thanks, Jayson. No, I would say controllers is probably not a great metric for the business now given that we're tending to place controllers as second controllers or replacement controllers, or moving people into the office. But, I would say it's -- in the United States we did see a fundamental growth in unit demand. I would say that was across both the hospital and the office.

Okay. Fair enough. And maybe for Howard just on the Cervista, I think you mentioned several contracts. Are those dual source contracts or did you in fact displace your competitor there?

I actually think you're referring to one of the transcripts. What they said were several, not seven.

Oh, okay.

Yes, -- the contracts we're signing typically are displacing the incumbent and going 100% with Cervista.

Okay. Thank you.

Yes.

Our next question comes from Sameer Harish from Needham and Company.

Hi, guys. Question for you on the guidance. You're reducing guidance for the year, but third-quarter generally came in kind of above what people were expecting. Is this tied primarily to Selenia sales that you're decreasing expectations for, and -- the reason I ask is backlog wasn't reduced by that much. So what led to the uncertainty in the fourth quarter?

I think we're talking about the revenue. And I guess we're within the range that we have been talking about for three quarters now for the fiscal year. We were at 1.625 billion up to 1.65 billion, and it is true we're at the lower half of that range. The biggest change here is really the -- I would say the overperformance in Q3. It's not Q4 that changed at all. We typically would see a little bit of seasonality in Q4. We just had a stronger Q3 so I think we have come pretty much as we might have expected for the full fiscal year. And at the same time, we've been able to show some improvement on the bottom line. I mean, we did increase that EPS not just to the high end of the range but a little bit over the range that we had going back really three quarters ago.

Glenn, this is -- I would kind of reiterate that. We always find in the summertime internationally the holiday period for them. And it's very difficult to write business at that point in time. We expect it to happen as we expect it to happen every year. We're also concerned as I said in my part of the talk with international. Outside of Europe, I mean, you've got unemployment in Japan now at the highest -- I think the highest it's been in decades. So consequently, with what's happening over there, I think we have to be conservative, be practical in what the expectations are. And when we do a tad better, obviously we're all hopeful of that, and we're running our business based on, coming in at a lower number so we have tightened expenses and will continue to watch that very carefully.

Okay. And a followup on a caller earlier. Are you expecting or guiding to flat ASPs for Selenia including product mix for 2010? Did I hear that right?

We did not guide. We said that basically recovery -- I said that the recovery I think was going to be very slow. Economic recovery in the United States. And throughout the world and consequently, I think you're going to see hospitals continue to be very constrained and have tight spending on capital equipment in 2010. So obviously with those same pressures on our medical device side, our medical equipment side, capital equipment side, it -- it's going to put pressure, continued pressure on that business. So we would definitely not be looking for an increase on that side. It's the disposable side that -- and those that have exhibited growth to date this year that we would expect similar growth next year.

Okay. To sneak in a third, do you have a physician training target for Adiana that you can speak about for next year?

No. We don't have a target for physician training.

Okay. Thank you.

We have time for one more question. That question comes from Jonathan Block from SunTrust Robinson Humphrey.

Thanks, guys, for fitting me in. Just two questions. First one on breast health, there's some chatter about the replacement market and where we are there. Maybe you can give us a feel for out of the US Selenia's, what percent you believe came from replacement just directionally? Was it less than 5, less than 10? And then also sticking to Selenia on the international side, again maybe some direction if they were up or down year over year?

Rob.

Sure, Jonathan, this is Rob.

The -- as far as replacements for this year, as we look at the market, our -- our estimate and there isn't really a good way of measuring that, we believe that we're probably looking at something like around 15% of the units that were sold were being sold to sites that have already owned digital mammography and now are turning those in either because of fair market value leases or the fact that the equipment was dated. I would think that that number will increase for next year, but I doubt very much that it will go beyond 20% of the units sold. Again, I think we will start seeing that as the market matures, increasing as a higher and higher percentage.

Rob, let me add to that. That is as -- with an economy that recovers, 2011, 2012 will be the big years. We launched in 2003, sold 57 systems. So there's not much to replace. In 2004, I think we did something like 130. But then when we got up to 2005, 2006, 2007, that's when we really started putting up big numbers as did the whole industry because of the Akron trial and the published results there. So that's when all of our competitors and us in the market really started to drive. So 2000 -- I think, 2011, 2012. Right now you're seeing a lot of General Electric systems come off lease because they started in 2000. They had 500 placed in the first couple of years according to their press releases.

And I apologize, that is all the time we have for questions today. I would like to turn the conference back over to Mr. Cumming for any additional or closing remarks.

Thank you. I'll close by wishing everybody a good rest of the summer. And we look forward to talking to you in early November, at the end of our -- to report our fourth quarter and talk about fiscal 2010. Would also like to especially thank our folks in Costa Rica and in Madison, with the approval of these new products they've had a lot to do in getting ready for production and launch of these. And they have done a great job of working with us as did the folks in California who started with the Adiana product and turned it over to folks in Costa Rica. So many thanks to them. With that I wish everyone well. And we'll talk again early part of November. Thank you.

This concludes today's presentation. Thank you for your participation.