Hologic Inc (HOLX) 2009 Q4 法說會逐字稿

Ladies and gentlemen, good day and welcome to the Hologic Incorporated fourth quarter and fiscal year 2009 earnings conference call. (Operator Instructions) I would now like to introduce Deborah Gordon, Vice President of Investor Relations. Ms. Gordon, your line is open. Please go ahead.

Thank you very much. Good afternoon, and thank you for joining us for Hologic's fourth quarter and fiscal 2009 earnings conference call. I encourage everyone to visit Hologic's Investor Relations page of our website in order to review the power point presentation, related to the comments that Glen Muir, Hologic's Chief Financial Officer will be making in his opening remarks. A replay of this conference call will be archived on our Web site. Please also note that a copy of the press release discussing our fourth quarter and full year results, as well as our first quarter and fiscal year 2010 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, Inc. during the course of this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which is 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 details 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 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 principals, or GAAP. A reconciliation of these non-GAAP financial measures to the related GAAP financial measures can be found in Hologic's fourth quarter 2009 earnings release, including the financial tables in the release.

Please note that today's conference call will consist of approximately 30 to 40 minutes of opening remarks from management, followed by a thirty-minute question and answer session. We therefore ask each participant to please limit his or her questions to just one, with one follow up as necessary. Before I turn the call over to Jack Cumming and Rob Cascella, I would like to remind you of a few investor conferences Hologic Management will be participating in this month and next. Glen Muir and Rob Cascella will be presenting at the Citigroup's Small to Mid cap Conference in New York City on November 19th, at 9:10 Eastern standard time. Hologic management will be presenting at our annual investor meeting on December 1st, at 8 a.m. Central time at RSNA in Chicago, and Jack Cumming will be presenting at the NASDAQ OMS conference in London on December 1st , at 11:15 a.m., London time. All of these presentation will be webcast. The details of which may be found on the IR section of our website. I would now like to turn the call over to Mr. Jack

Well, thank you very much, Davin and good afternoon everybody. Thanks for attending our fourth quarter fiscal 2009 conference call. And as Deb said joining on the call today is Rob Cascella, our newly appointed CEO, Glen Muir our EVP and CFO, Tony Kingsley, head of our surgical group and Howard Doran head of our Diagnostics group. And all of us, of course. will be available during the question and answer session. I'd like to begin this call by speaking to our announcement today about Rob's appointment to CEO. I will then turn the call over to Rob to review our business performance in the recently completed quarter and fiscal year. And finally Glen will discuss our fiscal 2009 results, and our guidance for the first quarter and full year of fiscal 2010. We will then open up the call for Q&A. And as Deb stated, we are going to conclude this call in about an hour, out of respect to everybody's time. And it may run over a little bit, depending as we are going to try to get 30 minutes for Q&A ,so depending which we finish our part, we will then go right away into the rest.

First, let me start by saying it's a distinct pleasure to announce Rob Cascella's promotion to Chief Executive Officer. And as many of you know, Rob has done an exceptional job as our President and COO since 2003. All of us on the Company's Board of Directors believe Rob's depth of experience and proven leadership are key elements to Hologic enjoying continued success for many years to come. Having served as CEO since 2001, I've had the great fortune to work alongside Rob since he joined the Company and I'm absolutely certain Hologic will be very well served under his leadership. Rob's promotion follows the succession plan that we've had in place for quite sometime, and the timing of the appointment shortly following the start of our new fiscal year is a perfect opportunity for him to take the helm as CEO.

As many of you know, in his role as President and COO, Rob has been an active part of the executive team in setting the strategic direction for the Company, while also being responsible for the running of the day-to-day business. As a result, the transition to Robs leadership will be seamless. In my continuing role as Chairman, I'm excited by the opportunity to focus my energies on business development with special emphasis on expanding our international footprint, which is a major strategic growth initiative for Hologic for the coming years. Selfishly speaking, this shift in roles, allows me to do what I am most passionate about, working hand in hand with our sales team and distribution partners to promote our best of breed market leading technologies, helping drive growth through acquisitions and joint ventures, and playing a more active role with customers and local governments to find solutions to meet local market needs to deliver quality healthcare to underserved women on a worldwide basis.

I know I speak on behalf of not only myself but the rest of the Board of Directors and the management team of Hologic when I say Rob's strong management abilities and extensive expertise give us great confidence he's the perfect fit for this role. And at this point, allow me to congratulate Rob and welcome him to his new position. Before I turn the call over to Rob to review Hologic's 2009 operational performance, I would sincerely like to thank Hologic associates worldwide for the honor and privilege of representing them as CEO of Hologic for almost a decade. It is their passion, their commitment, their tireless efforts to truly make a difference in this world, that is not only motivated me but has humbled me knowing how much they have given of themselves. And finally a special thanks to Dr. Jay Stein and David Ellenbogen, our co-founders for giving me the opportunity to serve in this role. Rob, let me turn this over to you and wish you obviously the very best.

Thanks very much, Jack. I'm truly honored to take over as CEO of this wonderful Company. My sincere thanks to you and the rest of the board for the opportunity. I'd like to now turn to a review of our results. I'm pleased to report once again, our quarterly revenues and earnings exceeded our guidance. As stated in our press release, Q4 2009 revenues totaled $403 million, a 9% decrease from the fourth quarter of fiscal 2008 and essentially flat to Q3 of 2009. This compares to our guidance of $390 million to $400 million. The out performance was due to the strength in our GYN Surgical and Diagnostic businesses, as well as our growth in our recurring revenue stream from service. Again, offset by the continued yet anticipated softness in our digital mammography capital equipment business. Consistent with our report to you last quarter, we felt the economy had little impact on our consumables businesses. When factoring in our recurring revenue stream from service, these combined sales represented approximately 75% of our Q4 revenues.

For the fourth quarter of fiscal 2009 our non-GAAP earnings per diluted share were $0.28, beating our guidance of $0.25 to $0.27. This compares to our non-GAAP EPS of $0.30 for the same period last year, and flat to our EPS last quarter. For the full year of fiscal 2009, our revenues totaled $1.637 billion versus $1.674 billion from 2008, a decrease of 2%, and exceeded our guidance of $1.625 billion, and $1.635 billion. While non-GAAP earnings per diluted share were $1.17 as compared to $1.18 last year, and at the top end of our guidance of $1.15 to $1.17. I would now like to a minute to briefly provide the fourth quarter revenue overview by segment.

Breast Health revenues were $174.8 million, down 21% from $221 million for the fourth quarter of last year. This decrease was primarily due to reduced digital mammography revenues, as we are still feeling the effects of hospital budget constraints, coupled with the success we enjoyed from the lower end configurations of Selenia we now offer, which allows to us compete in different geographic markets. This overall reduction was tempered by strong growth in Selenia-related service revenues, as we continue to grow our install base, and to a lesser extent by growth in our breast biopsy products. Diagnostic revenues totaled $138.7 million, an increase of 4% compared to $133.7 million for the same period in fiscal 2008. We were very pleased with our global ThinPrep sales this quarter, holding fairly steady from last quarter and up year-over-year.

Imager adoption continued to increase in the US as measured by a higher percentage of ThinPrep tests imaged, particularly by our two largest lab customers. Consistent with the prior quarter, outside the US sales within European and Asia markets were solid. Our new Cervista test also contributed modestly to the revenues in the fourth quarter, and we are extremely pleased with the roll-out of this product and the level of penetration to date. GYN Surgical revenues totaled $67.3 million, an increase of 13% compared to $59.7 million for Q4 of 2008, solidly ahead of expectations and up sequentially, chiefly due to NovaSure procedure volume. Adoption of NovaSure, as an office based prove continues to remain a focus, and we are pleased with the growth and the percentage of our business for monthly standing orders. Our new Adiana system for permanent contraception, contributed modestly to the quarter, as we methodically roll out our global sales strategy. Skeletal Health revenues totaled $22 million compared to $28.1 for the same period in 2008, a decline of 22% and down $1 million sequentially. Sales of our osteoporosis assessment systems were again affected by the weakness in capital spending worldwide as expected.

Let me now turn to a brief review of our accomplishments of 2009. On last year's fourth quarter call, we fully anticipated 2009 would be a transitional year. Little did we know how much transition we would face as we ultimately navigated along with our peers the worse economic crisis in current memory. Given the substantial headwinds Hologic faced, I'm particularly pleased with our achievements overt year. First in this difficult year Hologic persevered, and in the face of a 2% decline in annual revenues, we aggressively reduced expenses and preserved our earnings, thereby reporting non-GAAP net income on par with last year, and delivering at or above our earnings guidance for three out of four quarters. Second, we continued to diversify our business away from economically sensitive capital equipment and toward consumables and recurring revenues, which now comprise approximately 75% of our revenues, and command higher gross margins, thus helping to further insulate our earnings power this past year.

Third, we generated substantial cash, approximately $500 million in free cash flow, specifically even as sales declined our free cash flow increased over 70% over last year. Fourth, we maintained and in many cases grew our leadership position in women's health. Despite the softer market we recently exceeded 5,000 total shipments of Selenia systems, making us the clear worldwide leader in digital mammography. Our share of the endometrial ablation market is estimated at 65% to 70%, with continued adoption of the NovaSure procedure, both in the hospital setting, and as an office-based procedure. Our share of the US Pap market remains steady at 70%, even in the face of competition, and our revenues outside the US increased nicely. Fifth, Cytyc and Third Wave are substantially and fully integrated into the fabric of Hologic, and have contributed substantially to the growth in our product portfolio.

And, sixth, we have made substantial progress on building out our international infrastructure, particularly in key markets specifically in mid-October we formally announced the opening of our Asia Pacific regional office where we plan to conduct sales and service training, product support and other key functions. We are very pleased to be driving the availability of improved healthcare for women globally. And finally, we brought the following new products to commercialization in 2009, Cervista High-Risk and 1618, Adiana and Eviva to both US and international markets, our MammoSite Multi-Lumen to the US market, and ThinPrep integrated imager to markets outside of the US. Of note, these new products also represent key additions to our disposable product lines which help to support an attractive long-term recurring revenue stream.

Turning now to review a few of our key new product developments, I'm happy to report considerable positive momentum among physicians and labs for Cervista, High-Risk and 1618. We are making solid progress and enjoying many successes in penetrating labs and signing up new customers. Although sales of Cervista were moderate in 2009, we believe we are laying a strong foundation for more meaningful revenues in fiscal 2010. In the quarter as you know, we introduced Adiana to the OB GYN community, and we are seeing solid success in registering doctors for training. During this limited launch period, we have gained very valuable information about the product and our training program, which we are now incorporating into our broader launch program. Limiting the release has allowed us to, one, to increase our confidence in the competitiveness of the product and the ability of our experienced sales force to train and sell to physicians. And, two, build sufficient inventories in Costa Rica to support the expected demand.

In August, we gained approval for our MammoSite Multi-Lumen device used in accelerated partial breast radiation for breast cancer therapy. The advantages of this kind of therapy include the targeted delivery of radiation, while minimizing exposure to healthy tissue. The Multi-Lumen product is a more competitive device as compared to our single Lumen offering, as a result of its ability to treat a wider range of cases. We began a limited market launch of the product in October, and anticipate full commercial launch by the end of this quarter. Finally, our ThinPrep integrated imager system received CE marking approval in late September. The integrated imager represents the latest innovation in cervical cancer screening by combining proven ThinPrep imaging technology, and slide review into a single convenient stand-alone device. Clearly the international market has been a source of considerable growth for ThinPrep as it converts to liquid cytology, and the integrator imager is expect to do consolidate the adoption of our ThinPrep technology. At tomosynthesis, the plan we described last quarter has not changed. We are in continuous discussions with the FDA, and are prepared a broad range of clinical trials over the next year.

Let me pause and remind you of the upcoming Radiological Society of North America, or RSNA annual meeting, which serves as an important showcase for our breast and skeletal imaging technologies. The meeting is November 29th through December 4th, and we will be hosting our annual analyst presentation on the morning of Tuesday, December 1st. RSNA draws radiologist's, technologists and hospital administrator from around the world, and this year we will continue to market our tomosynthesis system to international customers. And we will be featuring our new 2D Selenia Dimension system to US customers. We would also expect the meeting to provide us with a bit more clarity about the outlook for future hospital capital spending. In short, we once again expect this year's RSNA to be an important and productive meeting.

So in summary, we are pleased with Hologic's fourth quarter and fiscal 2009 performance, especially in the context of a difficult global economic environment. Our increasing diversified revenue base and focus on profitability enabled to us meet or exceed the guidance we have previously provided. We continue to generate very strong cash flows to reduce our term loan balance, both of which are key focuses of management. We also continue to bring new products to market, and to work on a new pipeline of new technologies to strongly position us for this year as well as the long-term. With that, let me turn the call over to Glen to provide the fourth quarter financial details and detailed guidance for fiscal 2010.

Thank you, Rob. I would like to now expands on the financial results for the quarter. Rob highlighted our fourth quarter revenue performance by segment. Our mix of domestic and international product sales continued to be approximately 80% and 20%. Foreign currency translation had a modest impact on a reported revenue growth, 1% year-over-year, primarily within the Diagnostics and surgical segments, as most of these international sales are dominated in local currency. Turning to the rest of the P&L, our gross margins on a non-GAAP basis was 61.5%, down slightly from the third quarter and up versus 60.9% last year. This excludes $39 million of amortization of intangibles, and is within our guidance range of 61% to 62%.

The year-over-year improvement in gross margins was due primarily to product mix, favoring higher margin disposable products. On a GAAP basis gross margins were 51.3% versus the 52% we guided to. We maintained the cost savings initiatives we put in place at the beginning of the year, and this continued to result in a favorable outcome. Our operating expenses on a non-GAAP basis of $117.4 million, primarily excluding amortization of intangibles of approximately $12.9 million, came in below our third quarter non-GAAP expenses, and also below our guidance of $122 million to $126 million. Further, when compared to last year our fourth quarter operating expense,s excluding the amortization of intangibles decreased approximately $9.1 million.

Absent the acquisition-related and other charges, pretax earnings this quarter were $114.1 million. Using our annual effective tax rate of 35%, non-GAAP net income was $72.4 million versus non-GAAP net income of $77.2 million last year, a decrease of 6.2%. We reported fully diluted non-GAAP EPS this quarter of $0.28 versus $0.30 a year ago, which was ahead of our guidance of $0.25 to $0.27. This adjusted EPS includes the operations of Third Wave, which equates to a $0.02 per share after-tax loss, also in line with our expectations. While our overall revenues for fiscal 2009 were slightly below last year, we did exceed guidance for the year and remain encouraged by growth in our Diagnostic and GYN Surgical segment, as well as the overall service-related revenues we generate.

For the year, disposables and service represented 72% of our revenues, and capital equipment represented 28%. This is up from 62% and 38%, respectively last year. For the full fiscal year 2009, our gross margins on a non-GAAP basis were 62.2%, up from 61.7% in fiscal 2008. This excludes $154 million of amortization of intangibles, and is within our guidance range of 61.5% to 62.5%. This improvement was primarily due to product mix favoring our higher margin disposable products. Our operating expenses on a non-GAAP basis of $482.1 million declined, compared with last year's expenses and were also below our guidance. In addition, absent operating expenses at Third Wave which we acquired in July of last year, the net decline in operating expenses this year was $34 million. This is due to the cost savings initiative we implemented in the beginning of the year.

Absent the acquisition related charges, pretax earnings for the year were $464.2 million. Using our effective tax rate of 35% non-GAAP net income was $301.7 million versus non-GAAP net income of $294.7 million last year, an increase of 2.4%. We reported fully diluted non-GAAP full year EPS of $1.17 versus $1.18 a year ago, which is at the high-end of our guidance of $1.15 to $1.17. This adjusted EPS includes the operation of Third Wave which equates to an $0.11 per share after-tax loss, compared to a $0.03 per share after-tax loss in fiscal 2008. Our total dollar backlog for all products was $323 million at the end of September, down slightly from $334 million at the end of June. We ended the year on a positive note, as backlog in our Breast Health segment increased to the highest level in three quarters. And this quarter we booked the highest number of Selenia digital mammography systems for the year.

Turning to the balance sheet, during the fourth quarter we repaid $96 million on our $540 million term loan which was borrowed on July 17th of last year, in connection with our acquisition of Third Wave. Thus we have repaid a total of $366 million of the term loan, leaving a balance of $174 million at the end of the September quarter. As of today, our balance has been further reduced by another $24 million to $150 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 $140 million of free cash flow in the fourth quarter of fiscal 2009, comprising of approximately $152 million of cash flows from operations, less capital expenditures of $12 million.

Moving on to guidance, I will first discuss fiscal year 2010 and then cover the first quarter. Note that our fiscal 2010 guidance reflects a continued decline in our hospital capital equipment business, as we have chosen a fairly cautious view as we enter the new fiscal year. During this past quarter we saw a pick up in Selenia digital mammography orders, and while the orders are for lower priced configurations as a result of our various product offerings, these trends suggest an improvement over the steep declines of the past year. However, given the trends is leaning toward lower ends configurations in the near term, and with limited visibility prior to RSNA, we are guiding to go lower mammography revenues in fiscal 2010 compared to fiscal 2009.

At the same time mammography related capital equipment only represented 23% of our total revenues for this recently completed fiscal year. So for fiscal 2010 which ends next September 25th, we are introducing total revenue guidance of $1.625 billion to $1.65 billion. This guidance reflects our current expectations that, number one, Breast Health revenues stabilize at our current quarterly run rate, reflecting continued softness and continued capital spending. Number two, Diagnostics and GYN Surgical revenues grow modestly due to, first, new sales of Cervista and Adiana. Bearing in mine these new products are starting from a small base, and will therefore move the needle only slightly, particularly in the first half of 2010, and increasing as the year advances. Second, increased imager adoption. Third, higher international sales and, fourth, more widespread use of the NovaSure system.

Number three, we are expecting service revenues to increase primarily related to our growing install base of Selenia digital mammography systems. And, number four, as stated in the press release, this guidance reflects a reduction of approximately $21 million in annual revenues year-over-year due to our decision to discontinue certain products, as we detailed in our earnings release. And, lastly, for tomosynthesis we continue to expect only international sales in 2010. We are looking for full-year growth margins of approximately 62% to 63% on a non-GAAP basis. We are expecting operating expenses in the range of $490 million to $500 million, up approximately 2% to 4% from fiscal 2009, and excluding the amortization of intangibles. We are expecting interest expense based on current LIBOR rates to be approximately $123 million. And as a result of our adopting APB 14.1 for accounting of convertible debt in fiscal 2010, the $123 million does include non-cash interest expense of approximately $71 million, which we have excluded from our non-GAAP adjusted guidance. Our effective tax rate, absent impairment charges, is expected to increase from 35% to 36% which by itself will have a $0.02 effect on EPS. We are expecting non-GAAP adjusted EPS of $1.15 to $1.19 per share, compared to $1.17 in fiscal 2009.

Next our guidance for the first quarter. For the first quarter of 2010 ending this December 26th, we are expecting revenues in the range of $400 million to $405 million. Our revenue estimates are driven by three primary factors. First, flat to slightly down Breast Health and Skeletal revenues compared to Q4 2009, as the capital equipment sales into the hospital setting continue to be constrained which affects our Selenia and digital mammography systems, our biopsy tables, and our skeletal Diagnostic equipment. Second, continued growth in our Diagnostics and GYN Surgical segments as well as recently launched Cervista HPV and Adiana permanent sterilization products. And third, the aforementioned reduction in revenue from discontinued products of approximate $2.6 million in the quarter, We expect gross margins of approximately 61% to 62% on a non-GAAP basis.

We are expecting operating expenses to rise slightly on a sequential basis to $130 million to 133 million, or 32% to 33% of revenue, primarily as a result of increased costs relating to trade shows and programs in the first quarter of each fiscal year, such as our national sales meeting in October, and RSNA in December. As well as increased sales and marketing costs related to our recently approved products. We expect interest expense to be approximately $33 million in Q1, including approximately $17 million of non-cash interest expense as a result of our adopting APB 14-1. Our effective tax rate is expected to be 36%, and we expect non-GAAP earnings per share, excluding the amortization of intangibles of approximately $0.24 to $0.26 per diluted share.

In fiscal 2010, we expect to generate over $500 million of free cash flow and to pay off our term loan. CapEx have never been a big part of our business and we are expecting CapEx of close to $60 million, and depreciation of approximately $75 million for the year. In summary, although optimistic about our market share position, strength of product offerings, and the new products being launched, our guidance is essentially flat with the year just ended, reflecting our uneasiness with the strength of the economy, and a cautious stance as we begin the new year with limited visibility. With that let me now turn the call back to Rob.

Thank you, Glen. In summary, we are very pleased with the performance of Hologic management team and our associates, during a very difficult economic time. We effectively managed our business by continuing to market and sell the highest quality products, and by always putting our customers first. Over this next year, our mission will be to maintain our number one position in women's health, through innovative product development, aggressive marketing and exceptional customer service. This now concludes our opening remarks. Jack, Glen, Tony, Howard and I 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 please observe Deb Gordon's earlier request that you limit your questions to one, with one follow-up question as necessary. With that, operator, please open up the call lines.

First question, JP Morgan, Tycho Peterson.

Yes, good afternoon. Wondering, and congratulations, Rob, on the promotion.

Thanks.

Wondering if you can comment a little bit on -- just some of the early marketing message around Cervista, and talk a little bit about with the two sales teams, lab sales and physician office, what message is being delivered to the sales force? And then to the extent you're starting to see interest in 1618 genotyping, and competitively how you're positioned against some of the accounts that are coming up?

Sure, Howard, why don't you take that question.

Hey, Tycho, thanks for the question. We are very pleased on how we finished the year, certainly as pertains to Cervista high risk. As you know the sales teams have been integrated now for the better part of nine months, since FDA approval and have been working very hard to go out and sign as many customers up as possible. As we've discussed before, the revenue has a slightly trailing effect. It takes a couple of months to get the contracts signed, get the validations completed, before you start actually reporting out live patients results. So I think a real good way to thinking about our business, is what is the value of the account that we've gotten to that point at the close of this year. And if you think about the contracts we closed, the people that we validated, and those that are actually giving our live results today, we will anticipate that we have somewhere in the mid single-digit market share at this point.

And if you think back to where we were prior to FDA approval, it was well under 1%. So we are very pleased with that initial progress that we've made. In regards to your question about 16 and 18, that's really a differentiator. As the labs industry itself, continues to become more competitive, it really comes down to labs being able to go out and offer things that others don't. What we have really found is, one of the reasons that customers are very interested in bringing Cervista HR in, is so they can package 1618 out to the customers, and more further differentiate themselves from their competition as well. So we are very pleased that that is important to them. It's not real material when it comes to revenue, but it is a differentiator for them in the marketplace, and it just makes the Cervista story that much more compelling.

Just one last one on that front, on type 45 seems to be, there's some noises in the market about that. Can you comment if you are hearing from customers about that being an issue that you don't have that in the product, or?

Actually we have not heard it at all. What Third Wave did is sat down with key opinion leaders, NCI, et cetera, and strategized on what was the best approach for genotyping of the future. I don't think you have to look any further than ASCCP guidelines, they recommended 16 and 18. That's the path they followed because KOL said it was the right one, NCI said it was the right one, and ASCCP has already adopted it, so we think we picked the right two.

Okay, that's great. Thank you very much.

Next up we have, David Lewis with Morgan Stanley.

Good afternoon.

Good afternoon.

Two quick questions here. Mostly on guidance. The first of all, Glen, just looking at next year you made some commentary as did Rob, about box placements and revenue for box sort of continuing that trend downward. If you look by our model revenue for box still is firm. Do you still expect revenue for box to be down next year? and Maybe you can talk about gross margins for the Selenia business as you move down market, do you still believe you can hold gross margins relatively flattish by lowering cost on lower revenue per box or has that dynamic changed?

David, let me start with that one. If we think about Q4 for a moment, the quarter just ended and the Breast Health results, what I tried to articulate was, will we expect to be stable for the rest of the year at that level, which includes at the end of the day a reduction in overall Selenia digital mammography sales. If we think back to last year, the first quarter of 2009, that was a big Selenia number for us. So just stable at today's rates will bring us under the 2009, when we think about 2010 guidance. The answer is, yes, we are expecting a decline in Selenia digital mammo units in the revenue from them to a certain extent as we changed the configuration and the product mix to more of a value and Encore items. So as we move to the value and Encore placements, I think the gross margins will compress a little bit as well.

Okay, very helpful. Just looking at SG&A for a second here, Glen, very good job constraining SG&A spending here this year, but heading into next year given the continuing push on HPV, as well as increasing push on Adiana, where are you taking from the SG&A line to fund those new programs?

I'll try to answer that. We've had a range of discretionary programs that we've become much more highly selective about, in terms of being able to fund or invest in. And where much of the growth in marketing will come from, or the funding for that, will be cutting out programs that we thought were either of a very high risk and low probabilities of pay back and so on and so forth. So there are still levels within our operating expenses structure that are discretionary in nature, that cover some of the other business lines that won't be using such dollars. So we can fund the growth drivers within the company.

Rob just lastly ,and I'll jump back in queue, the earliest you think we'll get an update in terms of your progressing time line with the FDA in tomosynthesis. Can you just update us on timing there? Thank you.

Sure, we really don't have a specific time. Right now we are in the process of multiple clinical trials, working with the FDA to certainly sort out protocols, and the like. And it would be a bit of an injustice, if what we tried to do, is literally throw a dart at the wall in order to pick a time in we can give you mean full information.

Okay. Thank you very much. We'll move on now to Josh Jennings, with Jefferies and Company.

Good afternoon, gentlemen, and congratulations, Rob. I guess my first question here, is just on your outlook for hospital spending, capital equipment spending specifically. Jack mentioned on the last earnings call, that he expected a very, very slow recovery of recovery in hospital budgets in the US. It looks like you've seen a little bit of improvement in this last quarter. Could you comment on how you're looking at calendar Q4 here into the 2010 in the US side? And also then what you guys are seeing internationally, specifically Europe in terms of capital equipment spending, and then your expectations there? Is it really just down tick to lower cost units, or are you actually expecting numbers of systems to be down as well?

We've really covered the range. As Glen indicated we had a good fiscal fourth quarter. But not thinking that one quarter is a trend, it's a little too early in fiscal Q1 for to us make a strong determination, primarily because much of the buying pattern starts after RSNA. So we have a little bit of a blinds spot to really get good market intelligence at this point. I would say that if we look both domestic and international, we see more activity occurring. Whether or not that activity ends up in order closure is yet to be determined. And, yes, depending on the market, we are bracketing it with different product configurations, so that the late adopters, those laggards that are just buying digital today, are really after our low ends systems. So we will see some configuration therein, as a result of that. Having said, that we are also at a point where we have an aging install base of customers that are now looking to replace. So we think that we may have somewhat of a mixed blending where our very high-end Dimensions 2D product. So the reason for the guidance, was really one of giving us a little bit more time to have visibility into the future to get an understanding of really where we think these markets were headed.

If I can follow it up with a quick question on your international growth opportunity, I'm looking back at when you guys acquired Cytyc, and some of the synergies you were expecting internationally. And looking at the US international sales mix, and it's still around 80, 20. When do you expect that to pick up for one, where do you expect that mix to be at the end of between 2010, 2011, and just how that impacts gross margins going forward?

Good questions, sure. The, if we look at what we've done internationally, we are now putting the infrastructure in place in different parts of the world, so that we can really define a growth strategy that allows to us support growth through better sales training, better service training. Up to this point, we've been really dealer-based, and we will remain dealer-based for a good part of our sales but we are building an infrastructure around those dealers to support them. With respect to what happens with ASPs, certainly depending on where we are selling around the world, ASPs will be impacted and that's across all of our product lines, not certainly limited to imaging.

But that mix effectively is compensated for us, to a certain extent by the fact, that if we are selling through dealers, then we don't certainly have the same operating expense infrastructure requirements that we would under a direct sales model. So when we look at international, we look at international from a growth perspective. How that changes with respect to mix between domestic and international, has a lot to do with what happens with our domestic business of course. So if our domestic business continues to be weak, then we would expect a percentage point swing in the percentage of our business that is done offshore. That is not the intent today. I think looking at it from a true dollar perspective, is where we are focused on, versus even the percentage mix between domestic and international.

Now we'll move on to Amit Bhalla with Citi.

Hi, good afternoon, I want to start on the Breast Health business, just two questions there. Glen or Rob, can you talk to us about what your assumptions are for fiscal 2010, and how much of that, how much of your numbers are predicated on the replacement market picking up? And secondly on tomo and the international market, can you comment on the adoption there, and how long sites are taking to get up and running?

When we put our plan together for for 2010, we anticipated there would be a reduction in digital mammography sales. And that reduction was probably somewhere in the area of 10% to 15% at the higher end of our range. If we look at the lower end of our range, we are contemplating a more significant reduction than that upper limit. Let's say it's as high as 20% or more. The reason for that, is just the unknowing of whether, or not we will see an uptick in the US market, which is really going to drive further sales. Or will the US market remain flat to down, and also be exacerbated by lower ASPs based on these configuration changes that we talked about. Going forward, the, I think that we see tomosynthesis as being a product for international markets, that will take a long time for adoption to occur, international has been typically slower than the US market. Each country needs to verify and validate. There's a separate regulatory process that needs to be affected. So although we are selling successful tomosynthesis, we are not looking for that to be a revenue driver in 2010.

Rob, just to clarify the first set of comments, when you were talking about the Breast Health reduction of 10% to 15% at the high-end or 20 at the low end, you're just talking about Selenia revenue there? What exactly are you talking about there?

That's really a combination of units and dollars. So units will be down by a certain percentage, and that unit reduction will be increased by an overall lower ASPs, as we move to the lower end of the market with our Encore and value systems.

Sure. The question on tomo international was just about how long sites are taking to get up and running. And my follow up on Adiana, was you mentioned a number of doctors have signed up for training. Can you tell us what percentage of those doctors are already using NovaSure? Thanks.

Yes, it's Tony. I would say fairly high percentage of them. We have not targeted them because they use NovaSure, but those are procedurally oriented physicians, and tend to be good (inaudible), so I would say those are a very high overlap.

Are you talking about like 80% or so, or can you give us a range.

I don't know for a fact but I suspect it's that high.

Okay.

Next in our queue, we have Jayson Bedford with Raymond James.

Hi, good evening, guys and congratulations, Rob. Just a couple questions. Just on the gross margin line, in the fourth quarter, it was a little weaker than we thought. It looked like both the Diagnostic and Surgical segment margins were lower both sequentially, and then quite a bit lower from last year. And I'm wondering I guess there could be some non-cash noise, in there but is pricing impacting the margin line tall?

No. Jayson, on the gross margin line it is not price, especially as it relates to the disposable products. It has more to do with the cost of the some of the manufacturing, especially the new products. The operation down in Costa Rica, we are trying to get it up and rung especially for the Adiana product. So it's on the cost side of initial I would say start and ramp up cost. It's not on, not on the pricing side.

Okay. And then, Glen, it looks like the implied guidance for gross margin kind of ramps up throughout the year, ramps. Is that indicative of Costa Rica coming online?

A couple of things, it is, yes, Costa Rica coming online. Also a greater percent of our revenues moving to the disposal products. I mean as we think about 2010, we are guiding to lower capital equipment sales, and those are the products with the lower gross margin. Now as if our sales dropped too low, we have some unabsorbed overhead of course, that we now have to cover on the digital mammography side. But for a moment the whole shift in mix to the disposals, will throughout the year give us a slightly higher gross margin, and approach a 53% level by the ends of the fiscal year.

Okay, great. Just a quickie. There's been reports out there that GE has taken some market share, and have you seen any of that? And does your data I guess, indicate that you've held digital mammography share? Thanks.

Yes, we are pretty confident although there is a lot of selling activity in the market, based on certain market data it appears that we have either held steady or have gained market share. So I -- I have no other comment other than what we are seeing in the market, is probably different than what you are hearing at this point.

Jayson, that MQSA data can be a little bit confusing at times especially on a monthly basis. So we tend to look at the NEMA analysis that's provided by all the manufacturers. And if you look at that quarterly, we are continuing to hold our 60% plus market share here in the US.

Moving on now to Isaac Ro with Leerink Swann.

Hi, good afternoon, and thank you for taking the question. Just first off, I was wondering if you could comment a bit on the changes in the reimbursement landscape, both medical imaging as well as across your consumables portfolio? Any changes there as we head into calendar 2010, that you think might impact your business?

We felt pretty good about our review of 2010 rates across the board. In fact, had some improvement or have held steady. So we are not looking for anything negative in terms of reimbursement impacting any of the businesses at this point, in comparison to 2009.

Great. Just secondly, putting aside for a minute the unique capabilities on 16 and 18 that Cervista has, was wondering if you can comment a little bit on what you think will be required to offer? Either from a bundling and/or automation perspective to start gaining some share on some of the bigger labs? And I think in the automation side, you guys had pointed in the past to sort of a mid 2010 availability for full automation. So I was just wondering if that's still on track, and just wonder what else you think you might have to do to gain some share?

We are not changing where we believe our automation will hit the marketplace. We are still confident in that I think the other thing that's really important to mention is, that we've had many customers come up to Massachusetts under nondisclosure agreements to take a look at what we are working on. And I think besides the fact that we are on track, which is even more exciting is their reaction to what they see when we share with them the platform. I don't think bundling is the right term. I think what's, what customers like, is they like buying the stuff from fewer organizations. And when you can go into a lab that you've got a strong, long lasting relationship on cytology, and you can add another line of business with them, and work together through the same service and application specialist channel, it's just a lot easier to do business.

I would not look at it from a bundling perspective, from a cost of acquisition or purchase, I would look at it that it's much easier to do business for someone who provides the complete solution from cytology all the way to HPV screening. So I think if you use bundling under that context I think it makes a lot of sense. We are very excited again about the instrumentation. And we think it will allow us certainly to get into larger volume labs as we start to unfold through 2010.

Great. Thank you very much.

Now we will hear from Oppenheimer & Company, Amit Hazan.

Hey, good afternoon, guys. My first question is on, Pap and HPV. I'm wondering if you can comment on US Pap market, and whether volume has been steady there. And just generally as you've been rolling out HPV, what you've been doing in terms of marketing, and how you've been going out marketing, being that the guidance says that you should do Pap plus HPV, only once every three years.

Sure. Let me start with the last question first in regards to, our physician sales force, what we've been doing, is we've been slowly deploying that group, in markets where we actually have Cervista High Risk available. So in those markets, we are absolutely out talking about the advantages of code testing with Pap plus HPV in women over 30. So we are out every day talking about the merits of the ASCCP guidelines, and giving recommendations for proper screening of women through the various products that we offer to the OB GYN. And that's only in, about 20% of our sales team is doing that today. Most of the activity obviously since launch has been on the laboratory side. We have talked on the last couple of quarters, actually the last three quarters, year-over-year a little softness in volumes. We actually saw it tick back up this quarter. So although we had reported that for the last few quarter,s we actually were very pleased with this past quarters performance, and we are starting to see an uptick. So I don't think any more deterioration in the economy has affected any volumes, nor do I see anything major happening on expansion of interval or through competition at this point.

And so just a follow up to that, and I'll ask my second question as well, would be are you thinking about for the next year? Is the Pap volume going to change at all based on HPV testing? And then the second question unrelated, is about backlog. It's been declining now for a couple of quarters, including this quarter sequentially, I mean. And I'm wondering since you talked about an uptick in orders in the breast, health side, if you can just give us a little bit of color on what's been going on with the backlog you report, and why it's declining. Thanks.

Yes, on the Pap market for next year again if you go back to the last year what we've really been saying is that we really thought the economy was having the biggest change involved in volumes, not competition and not expansion of interval. If we really foresee that continuing for the near future. There's no real evidence that real strong changes in behavioral patterns are occurring at the OB/GYN based on code testing. And I would say for 2010, we have an unchanged viewpoint on the material impact of that strategy.

Let me talk about the backlog real quickly, because the backlog becomes important more so in the Breast Health and the capital equipment side of the business, than it does on the disposables especially when it relates to contracts that could go out 12 months and involves standing orders. So that really has nothing to do with current business, but just a timing would have we sign those contracts. And I think that's what happened this quarter, because the fact is on the Breast Health side, our backlog and the number of Selenia orders, in fact went up. So that was a positive, even though the total backlog went down, which was driven more on the disposable side, but had nothing to do with losing contracts at all, but merely the timing of resigning new contracts. So I think we are kind of caught in the relevance of that backlog number for a moment. It does have more relevance on the Breast Health and capital equipment side, which was in fact strong in Q4. But that is a consolidated company-wide backlog number.

Let's go to Sameer Harish with Needham & Company.

Hi, guys. Thanks for taking the question. Really a question on Adiana. We've been talking to physicians and found a high degree of interest in offering more options in permanent sterilization. Largely to the give patients what they are asking for, and with such a large consumer component, when do you think you would be in a position to engage some sort of direct-to-consumer program? And do you think this would be, how tied to physician training, do you think would you engage it regionally, or ramp it sort of more on a national scale as you get more penetration?

This is Tony. I think we have a lot of work ahead of us. And frankly a lot of opportunity addressing the physician targets, so I think that will clearly be our focus as we go through the rest of this fiscal year. I don't think it makes, we have are we haven't thought it makes sense for us to do something significant on the DTC front, until we are comfortable we have the right cohort of physicians.

I guess in terms of guidance, you expect the physician training to be the catalyst for near term growth? Or do you expect more growth once you can move into that direct to consumer phase?

I think the answer is, yes, we expect physician training to be a catalyst for significant short term growth.

Thank you.

Our final question for today comes from SunTrust Robinson Humphrey, Jonathan Block.

Thanks guys for getting me in. Just a couple quick ones. Glen, the first one for you, Third Wave I believe you mentioned was $0.02 dilutive in the quarter. So when we think about fiscal year 2010, when do you think that turns the corner, and should be accretive to EPS?

Our original expectation was for Third Wave to be accretive in fiscal 2010. It's unlikely at this point, it will hit for the full-year accretive on a quarterly basis. We would hope by the end of the year it would. And part of the issue has to do with a couple of the products that were previously sold under ASRs that have been discontinued, because of the change in the regulations that we will not be continuing. So there was a fairly significant revenue drop with those products, that will have to be made up on the Cervista HPV side. So it's going to be towards the end of the fiscal year, Jonathan. And it's down ever doubtful it will be accretive for the full fiscal year, unless HPV really takes off beyond our current guidance for the year.

Okay. Great. And then, Tony, I believe this one is for you, just on the NovaSure front you mentioned about continued progress in office. What percent of the procedures for NovaSure are done in the office? And what does that tell us about how you are going to attack the market for Adiana, in other words, where are your sales guys going to hunt first if you would.

We are north of 15% of our procedures in office. We are continue to make steady progress. We obviously would like that business to grow quickly, but we continue to be very focused on moving physicians in office, and think we are continuing to have success there. As relates to Adiana, we do believe that Adiana is very well suited to the office. And we are actually think that in some sense Adiana may help to move physicians to the office on NovaSure as well.

Thank you.

Ms. Gordon, I will turn the call back over to you.

Sure, why don't I just close out. Look folks, while the broader environment is still of concern to us, we believe we are positioned to do respond to whatever the challenge. Our operational performance has improved considerably as we have successfully integrated two major acquisitions over the past two years. Our financial position is unparalleled due to our high level of cash flow, which we think is very positive, and our portfolio of market leading products is very diverse. We think we are technologically superior to our competitors, and we have highly relevant products from a clinical perspective. In addition to that, we think we have a group of people, our associates that are all very dedicated to the mission that we are on. So we are poised for success over the long-term. With that, I will thank you and wish you all a good evening.

Again that, concludes today's conference call. Thanks for your participation.