Hologic Inc (HOLX) 2011 Q4 法說會逐字稿

Good afternoon and welcome to the Hologic, Inc. fourth-quarter and fiscal 2011 earnings conference call. My name is Jessica, and 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 introduced Deborah Gordon, Vice President, Investor Relations to begin the call.

Thank you, Jessica. Good afternoon and thank you for joining us for Hologic's fourth-quarter and fiscal 2011 earnings conference call. I encourage everyone to visit Hologic's Investor Relations page of our website in order to view the PowerPoint presentation related to the comments that will be made during today's opening remarks.

The replay of this call will be archived on our website through Friday, November 25. Please also note that a copy of the press release discussing our fourth-quarter and fiscal 2011 results, as well as our first-quarter and fiscal 2012 guidance, is available in the Investor Relations section of our website under the heading, Financial Results.

Before we begin I would like to remind you of our Safe Harbor statement. Certain statements made by management of Hologic during the course of this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of Hologic to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

Such factors include, among others, those detailed from time to time in the Company's filings with the Securities 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, circumstances or conditions on which any such statement is 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 fourth-quarter 2011 earnings release, including the financial tables in the release.

Please note that today's call will consist of 30 minutes of opening remarks from management, followed by a 30 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. We do appreciate you may have additional questions, so please feel free to go back into queue, and if time permits we will be more than happy to take your questions at that time.

I would now like to turn the call over to Rob Cascella, President and Chief Executive Officer.

Thank you, Deb. Good afternoon and thank you for dialing in to Hologic's fourth-quarter conference call. Joining me on the call today is Glenn Muir, our Executive Vice President and Chief Financial Officer; Steve Williamson, who is dialing in. He is on the road today and he is our General Manager of our GYN Surgical group. Peter Soltani, our General Manager of Breast Health; and David Harding, the General Manager of International Operations.

Today I'm going to cover several points. We will summarize the fourth-quarter performance, discuss recent macroeconomic trends and how they impact our business, give you an update on the growth of our digital mammography business, including key elements of the very promising launch of our Dimensions 3D, our tomosynthesis.

I will provide you with a brief review of other key businesses and reconfirm our strategic vision for fiscal 2012 and beyond. Glenn will then talk about financial results in greater detail and provide our fiscal guidance for 2012. We will then open the call up for 30 minutes of Q&A.

Well, we are once again pleased with our results for this past quarter. For the eighth quarter in a row we have achieved record revenues. In Q4 revenues of $467 million increased 9% over last year's fourth quarter. We also reported year-over-year growth in all four of our operating segments.

Non-GAAP earnings-per-share of $0.34 was above our guidance and 12% above last year. Overall, we were very, very pleased with the financial results. Operationally we had several positive events occurred in the quarter, such as our acquisition of Healthcome, the FDA clearance of two products, and CE Marking for a third.

Well, it is difficult to have a discussion about financial performance without some reference to the global economy. The capital equipment market appears to be stable, but customers are holding onto equipment longer than typical. Growth will be driven by the introduction of new technologies, successor technologies, like tomosynthesis.

Our Diagnostic business remains on a positive trend for the current year and is expected to remain as such throughout fiscal 2012. It would appear that at a minimum more women are having their wellness exams.

However, surgical and other more discretionary procedures are clearly feeling the brunt of the weak economy and persistent unemployment, as evidenced by softness in NovaSure procedures and moderate growth in Adiana.

On a global basis 50% of our international business comes from Europe where many Eurozone countries are struggling financially. This potentially could impact our international growth going forward. Nuggets of strong growth remain, Asia, China specifically, and Latin America where we are investing in these growth markets with infrastructure and people.

I would like to talk a bit about our mammography business. We were very pleased with the ongoing performance of Dimensions with the strong uptake of both 2D and tomo sales in the quarter. In order to provide you with a better indicator for early tomo performance, I'm going to compare the market penetration of the products in the US to the pre-reimbursement targets we set a while ago, that being the 500 to 700 units that we have been referring to.

First, we are solidly on plan and encouraged with the initial uptake. We are roughly six months from the formal launch of tomo in the US, and we are approximately 20% of our 500 to 700 unit goal through this period.

Over fiscal 2012 we expect 3D penetration to accelerate and should finish the year at roughly 60% of this goal. This is all pre-reimbursement performance. And as we have said before, we expect to gain much more traction once reimbursement is achieved.

Over the course of this year we will attempt to provide additional details as to tomo progress, but do not anticipate this level of detail continuing beyond fiscal 2012. It is my hope that this additional information will provide some clarity to you.

Now let me review our reimbursement strategy. It is important to stress that over the last year our approach remains unchanged and we are on track, both in terms of milestones and timing. Recall that obtaining reimbursement is a multitiered effort. Short term we are following the recommendation of the ACR in assisting our early tomo buyers in obtaining reimbursement through the use of a miscellaneous code for the tomo exam, in addition to the reimbursement already established for 2D.

We have many cases of payers reimbursing at rates that range from $30 to $70 for the tomo portion of the exam. You may note that we have experienced some higher rates over recent weeks.

We continue to work with various agencies and advocacy groups in order to gain their support. I just spent a day in DC making members of Congress much more aware of the benefits of tomo. Around the first of the calendar year we will begin to have more meaningful discussions with CMS about a coding structure.

As for the clinical data that is necessary the most important data needed to secure reimbursement is from both US and international studies validating the performance of the technology. We expect to see preliminary data from Mass General at RSNA this month, with published results expected sometime next year. We also expect eight accepted abstracts to be presented at RSNA specifically about Hologic's tomo system. So research activities have increased substantially over recent months.

In addition, the 25,000 patient Oslo study is ongoing, and we look forward to reviewing the preliminary results to be provided at RSNA as well.

It is difficult to predict the timing of any reimbursement decision, however, we believe we have a comprehensive plan in place. Our best estimate today is that we believe we will secure a code and an amount by the first half of 2013.

Next I would like to talk a little bit about service revenues and specifically how they relate to our mammography business. With service comprising about 30% of Breast Health revenues it is a key driver of fiscal 2011 growth. It was up 14% when compared to the prior year's Q4 and up 20% on an annual basis. Service revenue will continue to be a growing annuity for us, however, as our Dimensions sales growth accelerates it will result in a temporary deceleration in service revenue growth.

This is due primarily to the decommissioning of a Selenia and loss of the service contract on that unit while the replacement Dimensions is under warranty for the first year, which does not generate service revenue. We estimate this will result in a year-over-year service growth in the mid-single digits for the next couple of years, and it is entirely gated by how quickly the Dimensions uptake occurs.

Now I want to talk a bit about some of the other key businesses. First, is our GYN Surgical business, NovaSure specifically. We continue to face headwinds with NovaSure. Fourth quarter posted a small decline when compared to last year. We attribute this primarily to the nature of the indication. It is an elective procedure, which carries a high co-pay and/or deductible. With the current state of the economy and unemployment, we continue to see the vulnerability of such procedures.

With this in mind, we are constantly considering ways to grow this overall market. Some of the tactics we are employing are as follows. We're going to continue to invest in DTC, but with a greater emphasis on conversion versus awareness.

In addition, we are adding to our GSP salesforce, or our surgical salesforce, to add more coverage in areas where there is the greatest potential. Over the last 60 to 90 days we have added around 30 heads in that group.

With respect to DTC, the program continues to provide positive results, but are being offset by the market challenges addressed earlier. Some of the specifics related to DTC performance are as follows. Our information requests exceed 18 times our normal rate. These are people that are reaching out to gain information on the technology. We had 93,000 women request information in Q4 alone, so when we talk about conversion it is this universe of interested women we are targeting.

We estimate the incremental revenue pull-through generated by the program for the quarter is approximately $11 million, and to date is just over $20 million. Market erosion and some share loss have nearly offset these gains entirely. We, obviously, expected a more significant return, but continued to invest because we believe the market potential is being encumbered by external economic conditions.

We also believe the current economic climate has presented opportunities for certain non-GEA competition. Our sense is that such competition is delaying the sales pull-through for NovaSure since they represent lower patient cost alternatives, but longer-term do not have the efficacy of our product. We view the effects of these alternatives as potentially delaying the sales of NovaSure, not replacing them. So we remain optimistic that this business will recover with an improvement to the economy.

Now for Adiana. Sales grew in the low-double digits for Q4 when compared to a year ago. We are experiencing strong conversion rates, which translates into more doctors performing Adiana procedures. Also, our reorder rate remains strong, and it is clear to us that doctors are not simply trialing, they are continuing to use the product. No doubt we are faced with competition compounded by a weak US economy, but nonetheless are continuing to increase penetration.

Some good news, finally, we believe the recent Institute of Medicine decision to include hysteroscopic sterilization as a fully covered procedure will benefit this technology during the latter part of fiscal 2012 and that our recent CE Marking should enable growth of this technology on an international basis.

Turning to MyoSure briefly, we remain very pleased with our MyoSure product, which is proving to be a very good acquisition for us. The feedback from clinicians remains positive, and our salesforce has embraced the benefits of the technology. Sales continue to grow and we are confident that this product will significantly contribute to Hologic for years to come.

Next, I would like to give an update on our Diagnostic Group, and more specifically Cervista. Overall the Diagnostic franchise made a strong recovery in Q4. Glenn will provide more details, but our ThinPrep unit volume grew over 11% in the quarter when compared to last year. This is the result of a partial US market recovery, complemented by strong international growth as we focus on emerging markets. We believe international growth will be sustained throughout fiscal 2012.

Cervista continues to be a growth driver for the diagnostic business. We again had double-digit sequential growth from last quarter as we continue to take critical marketshare in the midtier of the HPV market. We believe we can continue to grow this business irrespective of increasing competition due largely to the quality of our proven assay and strong customer relationships.

With respect to the progress on our high throughput automation, we are in active discussions with the FDA regarding the approval of HTA, and still expect approval in the first half of fiscal 2012. As noted in today's press release we received CE Marking of our Medium Throughput Automation System. The MTA system is intended for small to midsized labs, when we have already begun launch activities in Europe and are expecting increased international volume as a result of same.

From a development perspective we are broadening our product portfolio and investing heavily in this business. We are actively proceeding with the development of CT/NG and trichomonas assays, all based on our Invader chemistry, all available from our ThinPrep vial, and all able to run on our automation. We expect clinical trials to commence in fiscal 2012 with an FDA submission targeted for fiscal 2013.

I wanted to touch briefly just on the acquisitions that we did. And as you know, we closed on three of them in fiscal 2011. Interlace, which is MyoSure and TCT, our Chinese distributor, as well as Healthcome, our Chinese manufacturer of mammography systems. We are pleased with the progress being made on all three fronts.

As I said earlier about Interlace, the sales team is thrilled to have the product, and it has been very well embraced by our physicians. TCT provides an immediate presence in-country, with strong sales and marketing. And it is a sales group that is capable of selling a complete portfolio of diagnostic and surgical products for us.

Healthcome leads the way for offshore mammography production. We believe we will be in the local market with our new entry-level digital mammography system by our fiscal second quarter.

First intended for the Chinese market, our new Serenity products will be ideal for lower-end markets in Eastern Europe, Latin America, India and other parts of Asia. This will be a high-performance, low-priced digital system. We are thrilled to have this in our portfolio at this point.

Around the same time last year I provided you with our longer-term strategic vision and where we plan to take Hologic over the next five years. In fiscal 2011 we delivered on our first-year commitments. We met or exceeded both revenue and earnings targets, tomo was approved and launched in the US with early signs of success, we completed the first phase of our international expansion, and we closed on a promising tuck-in acquisition, Interlace.

The guidance in our press release, which Glenn will provide more detail, is the result of implementing the next phase of our strategic plan, and it is all about execution. Our summary objectives for the upcoming year include continued success with our tomo rollout. This is going to happen through broader education and awareness programs, better reimbursement support, obviously, expanded clinical trials, and a broader indication for use.

We are also going to broaden ThinPrep international expansion activities. We are going to focus on emerging markets like China, Brazil and Turkey, and to position ThinPrep as the preferred triage diagnostic for countries considering primary HPV screening.

With respect to Cervista, we are looking for sustained double-digit growth throughout fiscal 2012. Obviously, we need to get HTA approved, and we will continue to leverage our ThinPrep presence in the US and other international markets, in addition to broadening our product portfolio.

We are going to continue to invest in surgical, both in business and products. We remain committed to this business as we believe it possesses great growth potential across multiple product lines.

In addition to these objectives there are certain areas where we are investing in 2012. We remain consistent with the direction we set last year. Although Glenn will provide more detail on our capital allocation plans, the outline we established a year ago will apply to 2012, and that is organic growth and our ongoing investment in R&D. We are focusing on developing next generation technologies to enhance our broad portfolio of best-in-class products.

Our tuck-in acquisition strategy is to acquire product line extensions in new technologies complementary to our core business that allow us to leverage our sales and marketing infrastructure. And, finally, our aggressive expansion into international markets, adding infrastructure and acquiring distribution and manufacturing capabilities in places like Asia and Latin America.

In summary, we are pleased with our performance across all four operating segments this quarter and fiscal year. Our organic businesses have stabilized and our new product lines continue to gain traction. The early positive response to tomo is extremely encouraging, as are the trends in Diagnostics, particularly in our molecular business, coupled with the stabilization of ThinPrep.

We are also very optimistic about the contributions we will have from all three of the acquisitions we made this past fiscal year. While growth in our GYN Surgical segment, particularly NovaSure, is admittedly lagging our expectations, we believe this business has the potential to grow once our DTC efforts take off and the economy stabilizes.

We offer the most advanced products in women's health and have the resources to grow our markets to meet their fullest potential. Although we remain conservative with our revenue projections in light of the multiple challenges we face globally, we do expect to deliver improved top and bottom line growth this fiscal year and to generate solid cash flow from operations.

Thanks very much, and with that I would like to turn the call over to Glenn.

Thanks, Rob. Consolidated revenues of $467 million this quarter versus $428 million last year grew $38.7 million or 9% year-over-year, exceeding our expectations and driven by growth in all four of our operating segments.

Our Breast Health segment was the largest contributor to our overall growth, increasing $21.5 million or 10.9% year-over-year. Our Diagnostics segment posted strong performance this quarter, increasing $15.7 million or 11.7% year-over-year. And our GYN Surgical and Skeletal Health segments each contributed modestly higher revenues with increases of 1.4% and 2.1%, respectively.

Consolidated revenue on a constant currency basis increased 7.8% year-over-year. The positive foreign currency impact provided a $5.4 million benefit to the top line and approximately $800,000 to income before taxes.

Revenues in our Breast Health segment grew to $219 million in Q4 from $198 million in Q4 of last year. This year-over-year growth of 10% came from a $12.4 million or 9.2% increase in product revenues, and a $9.1 million or 14.4% increase in service revenues. Foreign currency added approximately 0.9% or $1.8 million to the year-over-year growth this quarter.

Breast Health product revenues primarily benefited from strong sales of our 2D, 3D Dimensions mammography systems, as well as from the 20% year-over-year growth in breast biopsy sales. Our digital mammography product sales increased to $83.3 million in the quarter, representing 38% of total Breast Health revenue. Service at $71.9 million was 33% of total Breast Health revenue.

Looking closer at the digital mammography product sales, revenue of $83.3 million was 18% higher than Q3 of last year and 7.8% higher than Q4 -- I'm sorry, 18% higher than Q3 of this year and 8% higher than Q4 of last year. This growth is being driven by a significant increase in both units and revenues of our new Dimensions line, which is -- accounted for almost 63% of digital mammo product revenue and 49% of units. This is up from 57% of revenues and 43% of units in Q3 of this year and only 37% of revenues and 32% of units one year ago.

We are quite pleased with the uptick we are seeing in 3D tomo and continue to believe that over time all 2D Dimensions sold will upgrade to 3D capability. As we have said in the past 3D Dimensions sales are in their early phase of US launch, and while Q4 sales showed a healthy gain from Q3, we still believe that meaningful 3D tomo sales will not really begin to accelerate until mid-fiscal 2012. However, as Rob indicated, at our current run rate we are well on our way to hit our target of shipping 500 to 700 tomo systems in the US within the first two years.

In addition, this quarter marks our highest unit number of digital mammography systems sold since Q4 of 2008, which was September 2008 three years ago, which happened to be our peak quarter. We are cautiously optimistic that the upward trend driven by the replacement market is beginning.

Switching to our other segments, our Diagnostics segment posted year-over-year growth of 11.7% with revenues of $150.5 million, up from $134.7 million last year. Foreign currency added approximately 2.1% or $2.8 million to this growth.

Our growth was driven by a 15.7% increase in sales of ThinPrep, the majority of which came from our acquisition of TCT in China last quarter. In Q4, TCT contributed revenues of $14 million, of which 80% is incremental since they have been our partner and distributor for the past 10 years.

With this being TCT's first full-quarter's performance, we are ahead of our internal projections, the integration is on track, and we are expecting close to 20% revenue growth versus their results last year.

ThinPrep unit volume worldwide increased 11% year-over-year from growth both domestically and internationally, continuing to support our view that the US market is stabilizing, while we continue to penetrate the international market. This quarter our ThinPrep volume was our second-highest total ever on a worldwide basis.

Our molecular business increased 32% year-over-year, led by continued strong growth of our Cervista HPV product, which was up 44% from Q4 of last year.

In GYN Surgical we reported revenue growth of 1.4% this quarter and 0.5% on a constant currency basis. Revenues increased to $74 million in Q4 from $73 million in Q4 of last year. Sales of our MyoSure products were the primary driver of growth in the period, and to a lesser extent, Adiana system sales. Both of these increases combined to offset the year-over-year decline in NovaSure sales this quarter as utilization of elective procedures in the US continues to be weak.

Our Skeletal Health segment also posted positive growth of 2.1% this quarter and 1.1% on a constant currency basis, with revenues of $23.4 million up from $22.9 million as bone densitometry product sales once again increased.

We are seeing continued growth internationally as our focus on international expansion is gaining traction. This quarter our international revenues were $115 million, a new high, and now represent 25% of our total revenues versus 23% last quarter and 20% a year ago.

Turning to the rest of the P&L, our gross margins on a non-GAAP basis were 61.9%, up 80 basis points from last year, as total gross margins for each of our four operating segments were up year-over-year, with the strongest contribution coming from Breast Health, largely due to increased service contract revenue resulting from increased service efficiencies and the inclusion of an increasing number of 3D tomo sales. This gross margin performance resulted in our achieving the midpoint of our guidance range of 61.5% to 62.5%.

Regarding operating expenses, our non-GAAP expenses continue to be well-controlled and were at the low end of our guidance, totaling $143.6 million, an increase of $18.4 million or 14.7% above our fourth-quarter 2010 non-GAAP expenses. The expected increase was primarily due to the inclusion of acquisitions, namely TCT, Healthcome and Interlace, this year and a full quarter of expenses from Sentinelle acquired last year.

In addition, this quarter also reflected an increase in expenses from our NovaSure DTC campaign. Our R&D efforts increased, but remain within the range of 6% to 7% of revenues.

Our non-GAAP earnings exclude certain items that are fully detailed in our earnings release. Absent the non-GAAP items, our adjusted pretax income this quarter was $132.5 million versus $125.3 million in Q4 of last year, an increase of 5.8%. Using our annual effective tax rate of 33.2% for the year, non-GAAP adjusted net income increased 13% to $89.6 million compared to $79.3 million for the same period last year.

We reported fully diluted non-GAAP EPS this quarter of $0.34 versus $0.30 a year ago and above our guidance of $0.32 to $0.33.

For the full year fiscal 2011 we reported revenue growth of 6.5% over fiscal 2010 or 5.8% on a constant currency basis. Fiscal year revenue growth was primarily driven by the 9.3% year-over-year revenue increase in our Breast Health segment, although all four of our operating segments posted positive growth.

Contributions from our three acquisitions this year added approximately 1% to our total Company revenue growth this year. On a non-GAAP basis gross margins for fiscal 2011 were 61.7% versus 61.5% a year ago and at the higher end of our guidance.

Operating expenses on a non-GAAP basis increased 12.5% year-over-year to $560 million, representing 31.3% of total sales versus 29.6% last year. This increase in operating expenses was driven by the four acquisitions and the NovaSure DTC program. Non-GAAP adjusted net income for this year increased 8.4% to $333.8 million or $1.26 per share at the high end of our guidance range and compared to $308 million or $1.18 per share last year.

Turning to the balance sheet, our cash balance totaled $713 million, up approximately $196 million or 38% from $517 million at the end of fiscal 2010. The growth in our cash balance is primarily due to the continued strong generation of cash from operations. Importantly, this growth in cash was net of the three acquisitions made in fiscal 2011.

Regarding free cash flows, we generated approximately $106 million this quarter consistent with Q3 last quarter. The current quarter's cash flows were comprised of approximately $119 million of cash flows from operations, less capital expenditures of $13 million. For the year our total free cash flow was $406 million, which was slightly below our target, primarily due to the increased working capital requirements of our recent acquisitions.

Now moving on to guidance. For the first quarter of fiscal 2012 we are expecting revenues of $465 million to $470 million. Year-over-year this reflects an increase in revenues primarily due to the contributions from our TCT and Interlace acquisitions and a slight decrease sequentially in the Breast Health segment, which we normally see this quarter as capital equipment customers begin to slow down their order activity going into RSNA. This results in expected growth rate of 8% to 9% on a year-over-year basis.

We expect gross margins of approximately 61.5% to 62.5%. We expect non-GAAP operating expenses to increase on a sequential basis from Q4 to $150 million to $155 million or approximately 31% to 33% of revenue, primarily due to the seasonal increase related to tradeshows, RSNA, and our national sales meetings.

We expect non-GAAP interest expense to be approximately $10 million in Q1, excluding $19 million of non-cash interest expense related to our convertible notes.

Our effective tax rate is expected to be approximately 34%. And we expect non-GAAP EPS to be approximately $0.32 on diluted shares outstanding of 266 million. This does reflect the expected seasonal increase in operating expenses related to RSNA and our national sales meetings.

For fiscal 2012 which ends on September 29, we are introducing total revenue guidance of $1.9 billion to $1.925 billion, which represents growth of approximately 6% to 7%. This guidance reflects our expectations that, one, Breast Health will grow in the mid-single digits, led by Dimensions and breast biopsy. Two, that Diagnostics will grow in the high-single digits, led by TCT and Cervista HPV. And, three, GYN Surgical will grow in the high-single digits, led by MyoSure and a rebound in NovaSure.

We expect contributions from our three fiscal 2011 acquisitions to account for approximately 2% of the total topline growth.

We are guiding to non-GAAP gross margins of 61.5% to 62.5% for the year. The key driver to future margin improvement is the expected increase in revenues. We expect operating expenses to be in the range of $590 million to $600 million, up approximately 6.7% from fiscal 2011. This reflects the additional cost primarily associated with a full year of TCT, Healthcome and Interlace. And we are expecting interest expense to be approximately $42 million, excluding $79 million of non-cash interest expense related to our convert.

The effective tax rate we are expecting is approximately 34%. And we are guiding to non-GAAP EPS of $1.35 to $1.37, which implies growth of 7% to 9% year-over-year. This increase is the result of our expected increase in revenues. We expect 269 million of diluted shares outstanding for the year.

We are sensitive to the multiple macro headwinds out there so remain cautious with our guidance. At the same time we expect to see growth across all of our operating segments, especially in the United States. We are encouraged that as we look forward to FY 2012 that many of our new products, such as tomo, MyoSure, Cervista HPV, and our expanded distribution in China can all be meaningful contributors.

Turning to cash flow guidance. We expect to generate approximately $400 million to $425 million of free cash flows, which continues to be driven primarily by our operating earnings. As you are aware, capital expenditures are not a big part of our business and we are expecting steady CapEx of about $50 million and depreciation of approximately $65 million for the year.

Our plans for use of cash remains focused on investing in our current technologies and operations, potential tuck-in acquisitions, and preparing for the possible redemption of the first tranche of our $1.275 billion of convertible notes, which are expected to be redeemed in December 2013.

Our capital allocation plan is focused first on being opportunistic regarding tuck-in type acquisitions that will help drive above-average topline revenue and earnings growth, and secondly being mindful of the convert redemption two years away.

To try to give a little bit more clarity on our acquisition strategy, our criteria includes passing financial muster. This entails a fairly rigorous valuation model that tests the sensitivity around various revenue assumptions, cost synergies and returns at various risk-adjusted cost of capital metrics.

We looked at earnings accretion, payback and total IRR, all of which we believe will give us a better answer than alternate uses of capital. At the same time we are in no rush, and to the extent are unable to find suitable acquisitions, intend to address the outstanding convertible by redeeming a portion in order to capture a positive return and deleverage the Company. Our preference would be to reduce our debt balance over time.

At the same time it is unlikely we would enter the market anytime soon to try to redeem part of the convert early, primarily because of the tax recapture payment that would be due. So we do feel we have ample time to see how we make out with bolt-on type acquisitions in the meantime.

In addition to weighing our options regarding our convert, we also spend considerable time analyzing other opportunities for the use of our strong cash balance, including a potential share repurchase. Due in part to our depressed stock price during certain times of the year, we reviewed the benefits of enacting a share buyback program. Although tempting, we decided at this time to stick with our core directives to expand the business in higher-return tuck-in acquisitions where we could leverage our operating infrastructure and distribution channels.

We will continue to evaluate all options. In the meantime we feel it is in the best interest of our shareholders to maintain a solid cash balance, to be able to reinvest in our business, complete future acquisitions if they are fiscally sound and fit into our strategic initiatives.

In summary, in a somewhat challenging environment we are pleased with the year, the potential of our recent acquisitions, our push into international markets, and mostly, the opportunity 3D tomo presents as the replacement market develops and tomo becomes recognized as the standard of care. And with that let me turn the call back to Rob.

Thanks, Glenn. I just want to remind everyone that we are holding our Analyst Day at the RSNA in Chicago this year once again. That event will take place on Tuesday, November 29, and it will begin at eight o'clock in the morning. The agenda will really be a much deeper dive into Dimensions and a look at some of the influential data that will be coming out of the Oslo study as well as Mass General.

Thank you very much. And we really appreciate you participating on this call. And I would like to now turn the call over to the operator so that we can open it up for Q&A. Thanks again.

The question-and-answer session will be conducted electronically. (Operator Instructions). Jon Groberg, Macquarie.

Congratulations on a solid quarter. Obviously, a lot of questions we could get but I'll just ask one, and the one that most people are focused on is guidance. I guess, if there was one thing to kind of nitpick at here would be that you are -- still your earnings growth is tied to your revenue growth. Maybe you can just talk about as you think about 2012 what the puts and takes are in terms of getting a little bit more earnings leverage from the topline that you're talking about?

I think it is a combination of a couple of things. Obviously, we think we do get better leverage as our revenues materialize and as our revenues grow more quickly. We also think that product mix is a big contributor, so in providing guidance we took maybe perhaps a conservative view on product mix. But they affect material changes in gross margin as we shift to higher margin tomosynthesis products, higher-margin Diagnostic products and/or Surgical.

So there is really a blend in terms of the assumptions that were used in that gross margin. We believe that depending on that, combined with an uptake in revenue, could materially change the margins within that range.

Okay thanks. I will leave it at one.

Thomas Kouchoukos, Stifel Nicolaus.

I guess on tomo you guys actually -- I think you provided a lot more of the metrics that I think people have been asking about. One question -- we appreciate that. One question I have is just looking at your mix of 2D, 3D systems as a whole, can you -- I don't know if you can provide an actual number, but maybe give us a sense of when a customer buys 3D or upgrades to 3D, how many machines are you selling out there that is kind of everyday encapsulated into one versus maybe somebody that had bought a 2D system last year and just decided to upgrade to 3D?

I think -- let me start with that question. I think there is like, I guess, two questions here. One relates to Dimensions in general and what percent of total sales that we are seeing today, and it is substantial. Over 60% of our units now of digital mammography are of the 2D, 3D Dimensions.

And then to further break that down, the 3D comes in two pieces. One as a complete system sale as part of Dimensions, and secondarily as part of an upgrade to an already existing unit. So, first of all, most of our 3D tomo sales are in fact of a complete system. And we are seeing the tomo upgrades to that installed base, but it is a much smaller number than the initial full-bodied 3D going out the door.

At the same time, the rationale for most people on moving to the Dimensions platform is to add 3D over time. So our expectation would be to see those software upgrades kick in in the future, probably at a point in time where we get better traction or visibility on, A, the reimbursement and, B, the clinical evidence -- the publications in the marketplace supporting the clinical utility of tomo itself.

Okay, that is very helpful. If I could follow up one quickly on your Adiana CE Mark. One, I just wondered how important is radiopaque to the product? And then what does that mean for FDA approval in terms of the process that you would have to go through?

Sure, we think obviously, radiopaque is an improvement. It is an evolutionary improvement to the product. We think that will be important, both for our international sales and here in the States.

We are in discussions with the FDA around radiopaque at this point in time. So it is unclear as to what the approval timeline would be for that product.

Okay, thank you very much. I will get back in queue.

David Lewis, Morgan Stanley.

Hey, Glenn, first question on leverage. I wanted to come back to it. If I basically look at the impact that DTC had on your SG&A spend for 2011, and then think about 2012, I guess I'm surprised to see you growing SG&A pretty close to in-line with revenue. Can you maybe walk through some other components that are driving that or do you plan on spending more money on DTC than you were spending in 2011?

Well, there is a couple of good questions in there, David, one having to do with DTC, and maybe I could just start to answer the DTC one first. And our initial program for DTC was over a 15-month period to allocate approximately $20 million to that program. And we are about 12 months into that program. So we have already spent close to $15 million in DTC, and we are getting a return. And it has been a positive return, but as Rob indicated, not anywhere where we had hoped it would be. But at the same time we are still seeing some of the benefits from that awareness and do expect that to also present itself in FY 2012 for the first half of the year. So we are still expecting to see a continued growth in NovaSure directly related to that DTC.

Now, will we continue to expand at this level in FY 2012? No, we won't at all. A lot of that awareness is out there today, and we will maintain some of the expenses to keep it going, but it will be nowhere near the level that we spent in FY 2011.

So then the question is where is the leverage on the SG&A side if we are not spending it on DTC? And a big part of that is being taken up by the new products, the three acquisitions and the expenses associated with those three acquisitions, and growing their particular market or their particular territory.

So we are kind of shifting resources from the DTC to new products that we believe will help grow the topline revenue. Our revenue guidance going into the year, as I said, was about 6% to 7% for FY 2012 over FY 2011. But that is basically where our breakeven is. Our breakeven on leverage is about 6% revenue growth, but I think there is a lot of upside if we think about the three segments and the potential in those segments.

Within Breast Health we have the upside conceivable from tomosynthesis kicking in. In the GYN Surgical it is MyoSure, and within Diagnostics it is both Cervista HPV and it is the TCT efforts in China.

So there is a lot of positives as we look forward into FY 2012, but you are correct, we have to move that revenue needle up beyond 6% to get real leverage in the business, at which point I think we will get pretty significant leverage. But it is still early for the year and it is still -- our guidance I think does reflect that it is early in the year for us to make that revenue projection.

Okay, that was very helpful, Glenn. Thank you for the color. And Rob, just a quick follow-up here, versus our model, Diagnostics seems to be driving more of the upside. But I actually had a question on Surgical.

Just considering the trends we saw with NovaSure this particular quarter, and you're still guiding to upper-single-digit surgical business, it does imply probably a bigger number for MyoSure than, I guess, we had in our model. Maybe just talk to us about your confidence that NovaSure can trough then rebound throughout the balance of the year and your confidence that MyoSure can make up the difference.

We obviously do think, I think, highly of the MyoSure product and the potential for it, David. So there is a component of that growth that is being related to it. Obviously we express it as a business segment versus each of these product lines.

And we have to say there is a growth element in Adiana and there is a growth element in NovaSure. So between the two legacy products, if you will, and the addition of MyoSure, that is really where the upper single-digit-growth number came from.

Okay, thank you very much.

Bill Quirk, Piper Jaffray.

Two questions for me. First off, Rob, a little color on the OUS mammography business. You obviously talked at length about the US side, but I'm curious to see what the trends are there?

Sure, I'm going to have David Harding chat about that with you. David.

Thank you very much. We continue to see very good adoption of both our base Selenia business and our Dimensions business in a wide variety of places all across the world. We saw a pretty dramatic uptick in Europe despite all the headwinds in the Southern European countries. We saw good growth in Asia. We saw good growth in Latin America, and also in Australia/New Zealand, as well as in the Middle East and South Asia.

So really across the entire world we are seeing new countries come on board with Dimensions, both tomo and 2D while we continue to penetrate, I guess, the lower end of the market with our Selenia units. So we are very, very excited about the growth there and saw good, strong double-digit growth in virtually every market across the world.

Very good. And then just thinking a little bit about Cervista. Now that we have another competitor on the market, we have had some accounts, I think they have been waiting to see the fourth one enter, and now our diligence suggests that we could be seeing a number of different valuation protocols at this point. Rob, any comment here about how you think about this franchise going forward, any changes to competitive positioning, etc.?

Sure. And as we have stated earlier, our strategy thus far has really been to segment the market and go after the low to middle tier. We think our product, our assay, is most appropriate for that segment of the market.

I think with the approval -- the pending approval of HTA we do think that changes the game a bit, and we believe that we would be better positioned to go after a larger segment of the market as well.

So I think where this is going to shake out is that there is not going to be one company that prevails in this battle for HPV. And it is going to be four companies vying for share. And the upper tier of the market is going to get a bit crowded, and I think the low to mid tier of the market may be a place that we can excel. And that is where we have proven that our product is appropriately positioned, so we will certainly continue to exercise that while we duke it out at the upper tier of the market with the other two entrees.

Got it. Thanks, guys.

Nandita Koshal, Barclays Capital.

I guess my first question is could you talk about what proportion of tomo users today are reimbursed in an amount over say a minimum $20? You sort of gave us that range of $30 to $70, but what does the average look like?

The average is probably somewhere in the area of $40 to $50. And it is early on, so we want to be clear about that. But it is encouraging in that what this does is establish a value to the tomo portion of the exam, and that is where this is going to be useful for when we do finalize a permanent reimbursement solution.

So I want to caution that we don't believe this is a long-term solution. It is a way for our customers to have an interim solution that we then can also use to establish value when a permanent solution is derived.

Okay, that is very helpful. And, Glenn, if you could help us with the margin outlook for the Breast Health segment next year. How does the service versus the instrument versus the software upgrade piece play out? And what are the expectations baked in around that in your guidance right now?

Sure, and I will give you a rough sketch, and hopefully this will make sense and it is one of the reasons why we detailed a bit more about service as well was that if you look at the business, what we see is that there is going to be some margin improvement that is going to be fueled by a higher quantity of tomo systems sold. So even the complete gantry, inclusive of tomo, but -- and not just the standalone software upgrade, will have attractive margins. That will drive the business relative to a gross margin improvement.

Now a partial offset may be as service revenues slow, there can be a negative impact on margins as a result of that. But overall we think that the margins for Breast Health will be favorable for the year.

Let me also add to that, if I could. Rob is absolutely right on. Breast Health, as we know, is -- because the capital equipment nature of that business is our lowest gross margin segment, the diagnostic and disposable units provide gross margins in excess of 60%. So the corporate average is 61%, 62%. But within Breast Health, where we currently are today, it is in just over 51% with gross margins.

And I think there -- if we look in FY 2012 we are looking for upside to that gross margin as revenues continue to increase in that segment, which really helps in our overhead and in our allocations. And it is really being driven by the revenue increases we see from some of the higher gross margin products, and that would be the 3D tomo.

And in the future as the 2D Dimensions are being placed in the marketplace, if we get to the point where 3D becomes accepted as the standard of care, it will be at that point in time where we see the software upgrade to 3D tomo happen to what might be a sizable installed base at that point in time. And once again it is all about reimbursement and the clinical evidence. But at that point we would get the software upgrade and that software upgrade is a 95% plus gross margin component.

So I think the outlook for FY 2012 is very positive, I think, directionally for that gross margin within Breast Health because of the expected revenue increase and the product mix move into tomosynthesis.

Rich Newitter, Leerink Swann.

Thanks for taking the question. Just two quick ones. One, since you're talking about the leverage being very much predicated on revenue growth acceleration, perhaps relative to your initial forecast, can you help me understand some of the underlying baseline assumptions, for example, behind your GYN Surgical unit? What are you assuming in terms of any kind of market pickup? What more precisely are you thinking in terms of growth for NovaSure versus MyoSure and Adiana? And what is the baseline and what would constitute upside that could give us that leverage?

I think we have tried to stay a little bit away from the product line by product line, but I will say this that may help is that as we look at, obviously, NovaSure and any of the other businesses in Surgical, we are looking for some level of a recovery, or at least stabilization in that market. And we are anticipating that, and there is some of that that is reflected in our plan. In addition, we have added a significant number of salespeople to provide better coverage so that we can seize the opportunity going forward.

So the growth thought is one of a bit of a stabilization in the economy over the course of 2012 that really gets complemented by a broader salesforce and a bigger footprint relative to our coverage.

So is it safe to characterize maybe even your overall sales assumptions as a stabilization in 2012 with any improvement really probably to provide upside to your preliminary projections?

I think we feel more about that impacting surgical than I would say the other businesses. I think that we see a stabilization in our domestic Diagnostic business, growth with HPV, stabilization with ThinPrep. I think the capital equipment business, as I said in my opening comments, is really a different animal, and that is that it will be fueled by new technologies. So the replacement cycles will lengthen unless fueled by something that is exciting. And we believe that tomo fuels the replacement of existing mammography equipment.

So, fortunately or unfortunately, there is no one answer for our three businesses because -- the three primary segments, because they are dramatically different. And it is really the Surgical business that is most directly impacted by the sluggish economy today. And for, again, the reasons we gave in our opening comments, and that is that it is not a life-threatening procedure. It does carry a very high co-pay and a very high deductible, and as a result of that it is much more susceptible to the economic woes than some of the other businesses are today.

Thanks a lot.

Isaac Ro, Goldman Sachs.

I wanted to follow up on that last question from Rich regarding your assumptions for utilization trends on the Surgical side next year. If I look back qualitatively during earnings season it does feel like sequentially the trends here across other companies have not materially improved. And if we strip out some of the items in Surgical this quarter regarding the acquisitions of MyoSure and so forth, it does feel like the trend there is reflective of that bigger picture.

So I'm just wondering what leading indicators do you have that give us some confidence around your expectations for stabilization in Surgical next year?

So I think what we tried to build into the plan, I think, is really -- it is a bit of a conservative approach, but one that is also reflective of the fact that we have added 30 salespeople. So we have a brand-new product, which has a lot of leg room for growth, and that is MyoSure. And in addition to that we come off of a low with NovaSure now complemented by the trailing of DTC and another 30 sales heads, so we get -- but we have much better coverage just as a result of the those two elements.

So when we look at it, certainly, there is no way to predict with absolute certainty where the economy is going relative to unemployment or the like, but we also believe that we hedged that with better coverage and a better emphasis on converting the leads that we are now getting out of DTC versus just focusing on awareness.

That is helpful. And then maybe secondly for Glenn on the use of the balance sheet. You mentioned a preference to steer clear of buybacks. Could you maybe help put that in context? Obviously, asset prices for medtech have come down over the last year or so. And so maybe in that setting you could argue that valuations are more attractive for acquisition candidates. I am just wondering if that is the main reason why you're keeping to having more dry powder or if you just have sort of a stronger reason why you don't want to be buying back your stock at these levels?

No, there isn't -- it really has nothing to do with the desire to buy back the stock. I think we all would like to buy back the stock, but we only have limited cash flow as it is. And I think it is a healthy level. And at the moment as we look forward into the year, I think there will be opportunities that can drive a greater return and provide us with additional revenue and earnings expansion.

If we didn't see and didn't believe there'd be opportunities, I think we would feel differently about it, but we think there are. If they don't materialize, we are not in a rush and we are not going to do anything silly. If they don't materialize, we would like to deleverage a little bit. So the dollars on the balance sheet might simply be reallocated to lowering that debt level.

We are always looking at stock and considering a buyback, and in the future we may in fact consider it, but I think at the moment we are comfortable with where we are.

Right on, thank you.

Jonathan Block, SunTrust.

The first question, and Glenn, my apologies if I missed it, but just the backlog number at the end of the quarter and how that compares to the previous quarter?

The backlog -- you know, the backlog was $264 million at the end of the quarter. It was down $20 million or so from Q3. There is nothing special about that. Our backlog is no longer reflective of our business. It is a combination of capital equipment orders, which I would say is reflective of our business, but it gets masked by all these bulk orders and one year commitments that we did on the Diagnostic side, and it is very hard to really peel away what is really going on.

The way to look at it is backlog fairly steady. And it is really no longer a good proxy for what is going on in the business. (multiple speakers) too much disposable diagnostic stuff in there.

Understood. I just wanted to see if it was drawn down Q-over-Q. Then, Rob, for you, interesting comments on NovaSure and you have done a lot of work there. I just want to make sure I am understanding this. The rough math, if I take a step back -- and I think you believe the direct-to-consumer contributed an incremental $20 million to your US NovaSure sales. So if I just exclude that amount and look at what your results would have been ex the DTC, do you believe the ablation business here in the US is down 10% plus in 2011?

What I -- I think what I stated was that is our ablation business. As I indicated, it is really a combination of -- there is market erosion due to some of the economic factors that I gave, but I also believe that we lost share. I believe that we lost share when we introduced MyoSure. We got distracted relative to training, having a brand-new product in the field. And that is one thing that we are working towards to recover.

And then in addition to that I think there were some non-GEA competition that we would categorize as delaying the uptake in sales. So the combination of those three factors -- economy, GEA competition and non-GEA competition led to really the -- really offsetting nearly all of the growth that we think we got out of our DTC program. Is that a little clearer?

Yes, thanks for your time guys.

Sara Michelmore, Brean Murray.

It does strike me that the main swing factor here in the forecast is the trajectory of the digital mammography business. I'm just wondering if you can talk through the visibility you have on that and how you thought about building up your forecast, etc., just anything that could give us some sense of your confidence level in terms of how that is going to shake out, and if this is a base case scenario that could potentially be exceeded? Thanks.

This is Rob. I think when we put together our plan we went back and we looked very deeply and seriously at the numbers that we gave out earlier about that 500 to 700 unit forecast that we thought was pre-reimbursement. And as I said last quarter, and I would say it again, that we feel very good about that.

And that was comprised of a subset of what we think are early adopters. And they may be early adopters from a research perspective or they may be early adopters from an early commercial perspective and the reason why they want the technology is to market the benefits of it.

So between those two elements we think that that carries the product through this pre-reimbursement phase. Longer-term that is not going to happen, obviously. We need a permanent reimbursement in order for there to be sustained growth in tomosynthesis. And we feel very confident that as we move into fiscal 2013 that happens.

So as far as our numbers for 2012, we feel good about them or they would have not had been in our plan at this point.

And then if those types of customers that are really of the commercially typed that you talked about, can you give us just a little bit of color about what their plans are, what you've seen in terms of marketing? Are there any kind of regional areas that are hot, etc.?

Yes, I think it really is not so much regionally as it is about the profile of the site. There are some very commercially oriented sites that look at tomo as a way of marketing a bit of the sizzle behind the technology relative to its FDA claims, relative to the significance with respect to improved results and outcomes and so on and so forth.

So I wouldn't want to -- and I don't think that it is geographically focused. I think it is much more about profiling the right kind of sites and these are typically multiunit sites that are quite frankly in the business of diagnostic imaging.

Okay, and then just one last quick one on ThinPrep, just a clarification. So it does sound like most of the growth was from TCT, although you said the volume growth was up 11% as well, so I'm just wondering what the volume/price dynamic was in the US part of that business.

It is a great question. And I want to clarify that we already had the TCT volume, so incrementally the volume irrespective of TCT for ThinPrep is up 11%.

We actually see -- other than things like further consolidation in the US market, which has the tendency to bring pricing down because of larger labs buying smaller, there does not seem to be a tremendous amount of downward pressure on pricing here in the States.

As we branch off into new more emerging markets in different parts of the world, pricing is lower. But that is -- the dilemma there is one of do you walk away from the business or do you garner the business but at a lower gross margin and a lower UP? We have opted to go after that business because something was better than nothing at that point.

We have time for one further question. Bill Bonello, RBC.

Just one more follow-up on the Dimensions. Can you give us a sense -- the customers that had been ordering Dimensions how that is coinciding with capital equipment purchasing calendars? In other words, are most of the people into a fiscal 2012 calendar or is that something that could be a catalyst for additional purchases as we look forward?

This is Peter. I can answer that. Yes, the timing of the approval was certainly sort of midyear and completely out of phase with the capital cycle. So, yes, I think we will see a more planned approach to purchases going into FY 2012 -- FY 2012 for the buyers.

So is it safe to say that the people who have been getting systems thus far are essentially people who were scrounging around and still able to find dollars midyear?

I think to some degree that is probably true.

And then just one follow-up, which is in terms of the customers looking for more clinical data, customers that would want to wait for more clinical data before adopting, to what extent do you think the kind of data we are going to see at RSNA can be a catalyst on that front?

Of course, we don't control the content of what the investigators are going to present at RSNA. But certainly just the read of the abstracts, and based on what we -- at least, we think we know what they might present, the data that we are seeing it looks very, very strong. Certainly anecdotally we see great results from our commercial sites, clinical sites. So we feel pretty strongly that this will be a very important RSNA for those who are interested in getting that really strong clinical assessment as to whether or not tomo is in fact for real.

Thank you. That is all the time we have for questions today. This now concludes Hologic's fourth-quarter and fiscal 2011 earnings call. Have a great evening.