SenoRx, Inc. Q3 2008 Earnings Call Transcript

Executives

Lila Churney – Director, IR

Lloyd Malchow – President & CEO

Kevin Cousins – Vice President, Finance & CFO

Analysts

Jason Mills – Canaccord Adams

Junaid Husain – Soleil Securities

Amit Bhalla – Citigroup

David DeGiralamo – Vertical Group

Sal Saraceno – Griffin Securities

SenoRx, Inc. (SENO) Q3 2008 Earnings Call Transcript November 11, 2008 11:00 AM ET

Operator

Good day, everyone and welcome to the SenoRx Third Quarter Fiscal Year 2008 Financial Results Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Lila Churney, Director of Investor Relations. Please go ahead.

Lila Churney

Thank you and good morning. Welcome to SenoRx's Third Quarter 2008 Conference Call. Joining me from SenoRx are Lloyd Malchow, President and Chief Executive Officer and Kevin Cousins, Chief Financial Officer.

This conference call will follow the standard format beginning with prepared remarks by management and then we'll open it up for questions. Yesterday, after market close, SenoRx released a press release with our third quarter results. The release is available on the Investor Relations section of our Web site, www.senorx.com and with our Form 8-K filed with the SEC.

Before getting started, I would like to read our cautionary note regarding forward-looking statements. During the course of this conference call, the company will make projections and other statements about the company's business that are forward-looking including statements concerning future financial performance and guidance, including revenue projections, success of our recently launched Contura MLB and the development and acquisition of other new products and applications.

The success of recent investments in our sales force, long-term domestic and international growth opportunities and strategies, future spending on various aspects of our operations and expansion of the markets in which we sell our product. These forward-looking statements are subject to many risks and uncertainties that could cause actual results to differ.

A detailed discussion of the risks that affect our business is contained in the company's SEC filings, particularly under the heading “Risk Factors” contained in our most recent quarterly reports. Copies of these filings are available online from our Web site or the SEC.

The company's projections and forward-looking statements reflect management's current analysis of existing trend and information. However, they are based on factors that are subject to change, and therefore, these statements speak only as of the date they are given.

These forward-looking statements do not guarantee future performance, and therefore, you should not rely on them in making an investment decision about considering the risks associated with such things. The company does not undertake the obligation to update any projections or forward-looking statements.

Now, I would like to turn it over to Lloyd Malchow, SenoRx's President and CEO.

Lloyd Malchow

Thank you. I would like to welcome everyone to our third quarter investor conference call. Before diving directly to our quarterly results, let me provide you a brief overview of our Company. Our strategy is to expand across the continuum of breast care from diagnosis to marking incision treatment and reconstruction.

We continue to accomplish key milestones toward the goal. This goal and believe we have substantial momentum in executing our strategy to deliver strong revenue growth and build a profitable business as we progress through the remainder of 2008 and beyond.

SenoRx is well-positioned in an attractive market segment which is at the confluence of women's health and oncology. We're focused on a growing market for interventional diagnostic and therapeutic products and breast care while capitalizing on a consolidating U.S. customer base.

We have a growing portfolio products anchored by our EnCor breast biopsy system on the diagnostic side and our Contura Multi-Lumen Radiation Balloon Catheter or MLB as we call it on the therapeutic side of the market. The EnCor system is our lead diagnostic product for backing breast biopsies, increasing install base that (inaudible) for units, continues to be a key driver in growth and biopsy disposable revenue.

On the therapeutic side, Contura MLB is one of the new class of devices which is designed to reduce radiation treatment times to five days from six weeks to eight weeks in patients eligible for the treatment. Importantly, we believe Contura has the potential to expand the number of patients eligible for accelerated partial breast irradiation by providing radiation oncologists with the flexibility to precisely target the radiation bills for certain patients that previously have been excluded from this treatment.

SenoRx has been granted three patent relating design or manufacturing of Contura and has additional patents pending. We believe that Contura's Multi-Lumen design along with a vacuum feature and its proprietary manufacturing process, the material, can play an important role in the paradigm shift in traditional whole breast radiation therapy to localize partial breast radiation therapy.

The continuing positive feedback that we're receiving for Contura reinforces our belief that its innovative Multi-Lumen design and other products features can provide clinical advantages to patients that we hope to achieve.

We're cooperating with sites that have or will be submitting abstracts and papers for presentation and academic meetings including three of which that have already been accepted, one that was presented at the Astro in late September and two that will be presented at the San Antonio Breast Cancer Symposium in December.

We have completed the protocol for a long-term register study and we have 8 – 11 sites enrolling patients in the studies. In June, we implemented a new synthesis training program that focuses on implementing 3D dose planning for radiation therapy.

The program consists of five available modules including an interactive e-learning seminar, personalized training labs, onsite set up and training refreshers, 3D HDR remote planning and rapid question-and-answer learning.

We also provide ongoing planning and learning services. We believe that these programs provide an assistance into the system will benefit us in terms of increasing Contura pull through which we saw in the third quarter and we believe is accelerating in adoption.

While the EnCor system in Contura are expected to drive our growth for the near future, these products are complemented with portfolio of additional products including our breast biopsy tissue markers and Gamma Finder.

In addition to the continuing strong growth in installed base of our EnCor system, we've introduced additional products that strengthen our prospects of further incremental sales growth of our EnCor platform which include enhancements in both ultrasound and MRI.

We've also invested in the growth and quality of our sales organization infrastructure including expansion of our international distribution strategies. Currently, we have a 70 person field sales organization composed of 39 sales representatives, six brachytherapy specialists, 19 clinical specialists and 6 sales directors. We do not have plans for further expansion at this time.

The efforts of our sales team are complemented by our ongoing educational training seminars which are an important element in helping raise awareness of SenoRx and our portfolio of products. We've extended our educational training programs to cover radiation oncologists, businesses and breast surgeons engaged in the implantation of brachytherapy devices.

As I mentioned, we believe that these programs are only just beginning to bear fruit in terms of increasing pull-through at sites. We also continue to expand our international sales partnering with local distributors who are breast imaging and/or interventional radiology franchises.

We now market products through distributors in more than 20 countries outside the U.S. We are pleased with the success we've had in expanding our international presence and continue to see significant further opportunities in the international markets. We anticipate launching in additional countries over the next several quarters. In addition, we're continuing to work more closely with imaging companies complementing the ongoing globalization of our business.

Taking a step back, I don't normally comment on the external economic and business environment as our company and market segment is not generally considered particularly economically sensitive, but the magnitude of the global economic turndown and credit crisis that continues to play out means no one completely immune.

While overall sales growth continues relatively strong, we've seen a modest impact on the capital equipment component of our product portfolio. We've not seen any impact on average selling prices for any of our products.

We are also closely monitoring the number of mammograms performed for any additional potential impact on the potential number of biopsy procedures that we can expect from the EnCor placement.

Lastly, let me provide a brief update on the status of the litigation with Hologic alleging patent infringement. At the time of our last quarterly conference call, the court had granted a joint request by SenoRx and Hologic to stay proceedings in the case for every 60 days in order to provide the parties time to discuss possible resolution of the matter. Those discussions were unsuccessful and on August 22nd, both parties jointly requested that the court resume proceedings and reschedule the Markman hearing and a trial date. The Markman hearing was held on October 15th and there has not yet been a ruling.

In summary, I remain confident that SenoRx continues to be extremely well-positioned in breast care community. With the differentiated product portfolio led by EnCor and Contura MLB, our strengthened sales organization and emerging international distribution reach, our reputation for innovation and quality and a solid balance sheet all bode well for the future.

With that, let's turn our attention to our third quarter 2008 results. While recognizing that the third quarter is our seasonably slowest quarter of the year revenue growth did fall short of our expectations.

We believe that we continue to gain market share with our new EnCor placements and as a result, we believe that the external economic conditions did impact revenues as we saw our normal domestic capital equipment sales that typically occur at the end of each quarter slow as some hospitals and physicians delayed purchases.

As a result, growth and revenue for the third quarter was 26.5% to $11.3 million compared with $8.9 million in the third quarter of last year. Revenue growth in the quarter continues to be driven by increases in revenue for both biopsy disposables, biopsy capital equipment as well as strong growth and sales of Contura which has only just begun commercial sales in the third quarter, a year ago.

Biopsy disposables increased 28.5% to $5.1 million compared to $3.9 million in the third quarter, a year ago. The increase was primarily result of ongoing growth in the installed base of EnCor systems, which increased to 696 from 456 in the third quarter, a year ago and sequentially from 646 in the second quarter of 2008.

This represents an increase during the quarter of 50 placements level with the number of placements in third quarter of last year.

Biopsy capital equipment revenue declined 4.8% to $980,000. Increasing international sales due to distributors has been a contributing factor in the growth of this revenue category, but this was partially offset by slower U.S. capital equipment purchases that I mentioned which we believe were at least in part attributable to the financial turmoil unfolding in the last several weeks of the quarter. Some of these orders were deferred and have now been booked in the fourth quarter.

Diagnostic adjunct revenue, which consists of tissue markers and other products such as a Gamma Finder hand-held probe that helps determine if cancer has spread to the lymph nodes to $3.8 million in the third quarter of 2008, up 2.4% compared to $3.7 million a year ago.

Therapeutic disposal revenue, which reflects the sales of Contura was $1.4 million in the third quarter of 2008 and this compares with $187,000 in the third quarter of last year which was our first full quarter of commercial sales of Contura. More importantly, third quarter sales of Contura increased 32.9% sequentially from $1 million in the second quarter of this year.

We continue to be very encouraged with increasing number of clinicians that are currently using the product which grew to 182 at the end of the third quarter, up from 118 at the end of the second quarter, and 68 at the end of the first quarter. Although the majority of these sites are still in relatively early stages of product usage, we are very pleased with the growth rate and clinicians evaluating the product and with these surgeons willingness to embrace Contura's potential clinical benefit.

Moreover, usage at these sites continues to expand partially resulting from our newly implemented physicists training program as we exit the third quarter. We believe that this bodes well from the fourth quarter of this year which is seasonably the strongest quarter of the year for a number of procedures performed.

To support continuation of this positive trend, we recognize the importance to help facilitate efficient initial treatment planning experiences for the physicists. As I mentioned earlier, we have implemented programs and we are providing additional tools to that end including onsite treatment planning systems for new physicists, follow-up educational seminars and on-call physicist assistants.

I would also mention that at the end of the third quarter, we are now fully staffed with our brachytherapy field specialists. Finally, disposable revenue was 88.4% of total revenue in the third quarter.

We continue to be very encouraged by the ongoing improvement in gross margin which increased to 65% in the third quarter with sequential improvement each month within the quarter. This compares with 60.1% in the same quarter a year ago and is also up from 61.3% in the second quarter of this year. Total gross profit increased 36.8% to $7.3 million in the third quarter of 2008, up from $5.4 million, a year ago.

We continue to anticipate our gross margin will further increase as we move forward due to a number of strategic initiatives and cost reduction programs that we have previously outlined. These include continued growth and installed base of EnCor systems, growing contributions for higher margin Contura sales, improved leverage of our manufacturing overhead across increased sales volumes. Continuing cost reductions would transition certain component manufacturing to lower cost suppliers and leverage our investments that we have already made in tooling.

Our operating loss for the third quarter of 2008 was $1.8 million, consistent with $1.8 million a year ago. The operating loss included expenses related to being a public company and approximately $295,000 for the quarter compared with $185,000 in the same period last year.

Non-cash charges for stock-based compensation included in operating expenses for the second quarter were $641,000, slightly below the $655,000 in the third quarter, a year ago. I should say for the third quarter of this year.

To provide some perspective on our quarterly guidance performance if you exclude patent litigation expense and non-cash charges to stock-based compensation our net loss was $908,000 for the quarter compared with $1 million in the third quarter of last year.

Before I ask Kevin to provide additional detail on our P&L, let me comment on our 2008 outlook. With the first three quarters of the year now complete, we are adjusting our estimates to 2008 revenue to be in the range of $46.5 million to $48.5 million.

We continue to estimate that the deferred compensation in equity-based compensation expense will range between $2.8 million and $3.2 million in 2008. These ranges could be materially impacted based upon the fluctuation of the market price of our common stock.

With regard to the complaints filed by Hologic in January 2008, let me quickly summarize the developments to-date. In late April, the court denied Hologic's request for a preliminary injunction and ordered the parties to schedule a trial within 50 days to 80 days, which effectively accelerated the anticipated litigation related to our cost in the second quarter of this year. Prior to the commencement of the court order proceedings, SenoRx and Hologic jointly requested a stay at least 60 days to provide time for discussion over a possible resolution. As I indicated earlier, those discussions were unsuccessful and on August 22nd, both parties jointly requested the court to resume proceedings and reschedule the Markman hearings and set a trial date.

Markman claim construction hearing was held on October 15th, but no ruling has yet been made. Litigation expenses in the third quarter were $128,000, bringing the year-to-date total to $4.4 million. Our current outlook for patent litigation costs for the remainder of 2008 and beyond those already incurred is an additional $750,000 to $1.5 million depend upon the disposition of the Markman hearing and timing of the trial.

Ultimately, as a razor blade business model, we expect biopsy disposables and therapeutic disposables will be the longer-term key growth drivers for our business. Again, disposable revenue was consistently represented 85% or more of our total revenue.

I would now like to ask Kevin Cousins, our Chief Financial Officer to take a few minutes to review certain of our financial information.

Kevin Cousins

Thanks, Lloyd. I would like to turn our attention now to some of the operating expenses occurring within the quarter. Selling and marketing expenses increased 39% or approximately $1.7 million from the third quarter of 2008 versus a quarter year ago. The increase primarily reflects ongoing investment support, continued expansion of our Contura MLB commercialization efforts.

Our selling and marketing expense, on an annual basis, continued to grow at a slower rate than overall annual growth rate. Total headcount and related expenses increased $1.1 million for Q3 2008 compared with the same period a year ago, reflecting the expansion of our sales organization and consistent with our 2008 operating plan.

Our research and development expenses increased 3% or approximately $52,000 for the quarter – third quarter last year. This modest increase reflects the moderating of project-related costs predominantly for Contura MLB as much of the investment to support the initial development phase and launch of the product is now completed.

Our G&A expense for third quarter increased 14.5% or $175,000 compared to the same quarter a year ago. This included, as previously mentioned, $128,000 in patent litigation costs and also $295,000 for expenses associated with being a public company such as directors and officers, insurance, accounting and legal fees. These costs were partially offset by a reduction of professional fees and equity-based compensation.

As a category of expense, non-cash stock-based compensation for third quarter totaled $641,000 versus $655,000 the same quarter in 2007. Our stock-based compensation expense for Q3 2008 was slightly below for the same period a year ago. We're still running somewhat ahead of last year on a year-to-date basis.

Turning to non-operating income and expense, interest income for the second – for the quarter declined to $99,000 from $551,000 from the third quarter a year ago due to lower cash balances and lower interest rates. The lower cash balance is a result of our continued use of proceeds from our IPO in early 2007 including the repayment of long-term debt.

Primarily due to retirement of subordination – retirement subordinated debt facility would escalate in the fourth quarter 2007, interest expense for third quarter 2008 declined significantly to $22,000 compared with $452,000 in the quarter – third quarter a year ago. As a result, we had net non-operating income of $77,000 for the third quarter 2008 compared with $99,000 in the quarter year ago representing a variance of $22,000 for the two periods.

Our net loss for the third quarter is $1.7 million, approximately, the same as third quarter last year. This represents a net loss of $0.10 per share. Excluding patent litigation and non-cash charges for stock-based compensation, the adjusted net loss was $908,000 for the quarter compared with $1 million adjusted net loss for the same period last year.

As of September 30, 2008, we had approximately $14.6 million in cash and cash equivalents and debt of approximately $40,000. As you recall in November, we used $10.3 million for the early retirement of the outstanding balance on the Escalate facility. In addition, we have used $2 million for the retirement of the Century Medical notes in February, 2008.

We continue to believe that our cash reserves and cash flow from operations will provide us with adequate capital to support selling and promotional activities, invest in clinical development, support continuing commercialization of Contura, and other recent product introductions as well as continue our developmental activities supporting our product pipeline.

Notwithstanding during the quarter, the Company renegotiated its existing credit facility and now has the availability – borrowing capability of up to $12 million on our credit facilities. The share count and computing net loss for the quarter ended September 30th remained approximately the same at 17.2 million shares for basic and diluted versus 17.1 million shares for the third quarter 2007.

I would like to turn it back to Lloyd for question and answer.

Lloyd Malchow

Operator, we would now like to open it up for Q&A.

Question-and-Answer Session

Operator

(Operator instructions). We will now go first to Jason Mills with Canaccord Adams.

Jason Mills – Canaccord Adams

Hi, Lloyd, Kevin. Thanks for taking the question. Can you hear me, okay?

Lloyd Malchow

Yes.

Jason Mills – Canaccord Adams

Great. We'll start, Lloyd, with your operating expense line. It was significantly lower than what we had anticipated and we enjoyed seeing that. I wondered if you could provide us with a bit of color on how you're thinking about planning for the business not only in Q4 but also in 2009. And given the current market environment and the equities market especially, seems like folks are even more acutely focused and interested in companies that can be self-sustaining and get to that cash flow positive level if they're not already there. Perhaps you could give some color on your plans to get there within your current capital structure.

Lloyd Malchow

Sure. Thanks for the question. Obviously the macro economic environment is one that poses challenges. We believe that our business is likely to be impacted only to a modest degree. I would say that the impact on our – I would describe it as very modest, but very real. So as we enter the planning period for 2009 we will be taking that into consideration. We believe that although Q4, you'll see slightly higher operating expenses driven on the sales and marketing line. That's our meeting planning season. As we move into 2009 and build our budget, we'll be closely examining the trade-off between what kind of investments and what kind of spending that we'll have so that we think that we can initially – our initial thoughts is that we can build a business model that shows continued strong revenue growth and at the same time, pairs [ph] back on certain expenses that would allow us to possibly run the business at cash flow type of neutral or similar.

So, we haven't made a plan and we're not issuing guidance, but we think that within the options that we have trade off growth rate versus investment. We'll have to make some decisions about that balance prior to issuing guidance. But the business with the expanding margins and the fact that we built out our sales organization and now that we're at a point that we can achieve some leverage, gives us some flexibility in terms of making decisions on the trade-off between the rate of growth, which is going to be strong in any event and spending.

So, we think we have a great deal of flexibility and we'll maintain a very strong balance sheet. And we're starting to enter a period where we're getting leverage on our business as represented by the strong margin improvement in Q3 which we think we're only in mid innings on in terms of our ability to improve margins.

That together with the fact that we have built out that sales organization gets us to a period where we have leverage. So we'll – the one area that we'll need to assess before giving guidance in terms of cash flows will be what we think will happen on litigation expenses. And that's an unknown at this point. But we're very positive in terms of the fact that the business model that we've created, that we said between – mid 50s revenue range the cash flow business type of model and with our rate of growth looks like we're going to get there sooner rather than later.

Jason Mills – Canaccord Adams

Okay, Lloyd, thank you. That's very helpful. And with respect to that revenue growth that you mentioned – you mentioned that in any of it you expect it to be strong. I suppose what you mean is you could decide to invest more heavily and perhaps catalyze that growth a bit or not and focus more on the cash flow break even goal. Understanding that you're not at this point ready to give guidance and you're not sure where you'll fall on that scale, could you give us some idea of how you're thinking about top-line growth rates in 2009, perhaps excluding Contura given that we – it's a new product and it probably distorts growth rates a little bit. But in your base business, could you give us some idea of how we should think about the disposables growth rate within your franchise. Again, maybe perhaps excluding capital equipment because that is somewhat of a small part of your business and it is somewhat variable given the market environment.

Lloyd Malchow

Well, overall, we historically had mid-to-high 30s revenue growth. And the question that will be addressed before we give guidance is, is there any trade-off at all that we'll have to make on revenue growth versus cash flow considerations. In any event, the economic slowdown is only going to impact us probably modestly. We've not yet set the number. But we will be evaluating the type trading the balance between investment really for 2010 and 2011 versus cash flow considerations. I think because of the robustness in operating expense leverage and gross margin that we have some flexibility (inaudible) maintain very strong top-line growth and at the same time make cash flow considerations. So we will be sensitive to cash flow. We think that we're in an environment where you can't go raise money, we have very strong balance sheet in terms of the credit line on very favorable terms and we do not want to go to the market and raise money and we think that we have the ability to make decisions.

In terms of disposable growth, we're certainly going to see a continued increase in the number of placements that we have. We see no slow down in the number of placements that we have. And the question that we will be asking ourselves is will the decrease – modest decrease in the number of mammograms slightly impact the number of EnCor probes that we get from these placements and what does that mean in terms of the growth rate. It's going to be strong and robust, it's a question of would it be what it could have been in a perfect environment which is not.

So in any event, we're going to come forward with guidance that reflects strong revenue growth and my message would be though, we are very cognizant of the fact that this is a market that you don't want to be cash poor, we don't want to be raising money and we want to keep a very strong balance sheet. And I think we can find the appropriate balance between revenue growth and use of cash going forward. I still think that all segments of our business are going to continue to grow. We'll be watching anything that emerges in the fourth quarter in terms of trends. I was happy to see several of the orders that we lost or that were delayed at the end of Q3, come in early part of Q4. That's encouraging. And I would lastly say that the momentum that we saw coming out of the quarter for Contura was very encouraging.

Jason Mills – Canaccord Adams

That's good. Just last couple of clean up then I'll get back in queue. So with respect to the fourth quarter your revenue guidance even at the lower end, which you maintained, implies a fairly strong sequential increase. Are the orders that came through in the first part of Q4 that were normally supposed to fall in the Q3? Is that part of what gives you confidence you can achieve such a quarter-on-quarter ramp? And then what other factors could also be in there? And secondly, perhaps you could update us on the market opportunity that you see near-term for Contura. Is the market – end market growing in your estimation or are you simply gaining share from Hologic?

Lloyd Malchow

Okay.

Jason Mills – Canaccord Adams

Thanks, guys.

Lloyd Malchow

Yes, sure. You're correct in that, our positive feeling related to Q4 is bolstered by the fact that we've received several of those orders that we had hoped to get in Q3. But I think that the important thing to note is that sequentially, our base business historically has grown at about 17.5% quarter-over-quarter from Q2 to Q4 each year. So we know we're coming into the seasonally strongest part of our business and what we see so far in the first quarter is encouraging, but as you know, we had a pretty sensitive environment. But as we sit here, we're still optimistic that we're going to see strong, seasonal growth on our base business as we've seen in the past years.

With – as you point out, having received already several orders that we hope to get in Q3, and the momentum – coming out of Q3 that we had with Contura and that was basically demonstrated by the number of sites that were completing physicists training at the end of Q3 and the reorder rate –accelerating reorder rate. So we're encouraged and believe that we're at least at the quarter-over-quarter growth rate on Contura, may even do a little better, so that's pretty encouraging as it relates to the fundamentals of the business.

Jason Mills – Canaccord Adams

Super. Thanks, guys.

Lloyd Malchow

Yes.

Operator

Our next question will come from Junaid Husain from Soleil Securities.

Junaid Husain – Soleil Securities

Good morning, guys.

Lloyd Malchow

Good morning.

Kevin Cousins

Good morning.

Junaid Husain – Soleil Securities

Help me understand the softness you're seeing in your business. You mentioned in your press release that the slowing capital equipment environment is starting to impact your business. I guess I'm a little confused by the statement seeing as capital equipment is only a tiny piece of your business. Can you help us out (inaudible)?

Lloyd Malchow

Sure. Point number one is Q3 is always the lowest seasonal period for us when you look at historically and when we had stronger quarter-over-quarter growth, it usually comes on the capital side in terms of fueling that growth. Along with – you also get a slow down if your capital was impacted, it is also likely to impact certain placement of systems. In other words, the decision process has slowed down where you actually accrued disposable sales because you placed it, you didn't sell it. So the slowing down of the capital process, if you freeze for several weeks will impact your disposable and your capital business because, as you know, we gain revenues both from placement and outright sales.

So, if your placements are slowed down, usually get upfront disposable orders as part of the contract and your disposable line will be slightly impacted also. So we are also monitoring very closely whether or not the decrease in the number of mammograms which has been reported will have an impact on our disposable business going forward. And I suspect we will lose a couple of percent points of growth related to that.

Although I'm pretty optimistic on so far what I'm seeing in the present quarter we will need another quarter to monitor whether or not what degree that will impact our business going forward. So the answer to your question is Q3 is seasonally usually the slowest part of the year in terms of number of days procedures anyway. Number two, slowdown of freezing of capital equipment processes does in fact impact your capital line and your disposable line because your placements come with it. You don't get the capital sale, but you get disposable sales as part of the contract. So, there is a bit of a spill over there and that explains the weakness.

Junaid Husain – Soleil Securities

And then can you give us a read on pricing across your franchises? Has it been, is it up, down or basically stable?

Lloyd Malchow

One of the – we have seen stable pricing across all segments including capital in our business model. We're watching that really closely on a line-by-line basis but it's been pretty stable over the last four quarters. Obviously, something you want to watch in the environment going forward. But we have been pretty encouraged by what we've seen on the pricing side, but we'll be monitoring it closely.

Now, what I would say going forward is assuming that we have somewhat tighter credit markets, we are making an assumption that what we will see is a 50-50 blend in terms of capital placements and EnCor purchases. As you know – as I just indicated earlier, we place EnCor systems and we sell EnCor systems. And we had been for several quarters actually seeing a movement toward capital purchases versus placements. We would anticipate that going forward we would come back more to the historical balance of 50-50 in the environment going forward.

Junaid Husain – Soleil Securities

And what was that balance in this quarter?

Lloyd Malchow

I still think it was in the – actually 65-35 range. So, we've been averaging about 70%, 30%. So but I'm anticipating that going forward, at least as we're going to model it, we'll make an assumption that we'll go back to more of a 50-50 model for a while. And if it doesn't, that would be great, but we'll have plan for it.

Junaid Husain – Soleil Securities

And then last question for you with regards to your litigation with Hologic. Can we assume that all avenues for settling with Hologic have been exhausted or is a settlement still on the table?

Lloyd Malchow

I don't know about the question all avenues, but certainly we were engaged during the period and attempted to find an appropriate resolution. And we were unable to do so. But we'll always look at this situation and be practical in terms of the considerations and always be open to all avenues to get the optimal outcome for shareholders. But we won't close any door including continued litigation support.

Junaid Husain – Soleil Securities

Great. That's all I got. Thanks, guys.

Operator

Our next question will come from Amit Bhalla from Citi.

Amit Bhalla – Citi

Hi, good morning. I wanted to start with just a question or two on the capital side. Can you give us a rough idea of what your expectation is for the number of systems for the fourth quarter? I know you typically don't go into that detail, but maybe – it might be a little more appropriate this time around. And also give us an update on how the SenoSonix roll out has been going on in the capital side. Thanks.

Lloyd Malchow

To give you some perspective in Q4 of last year, we jumped from 50 systems in Q3 placements as was the performance for this quarter to 90 systems in Q4. Historically, Q4 has been the strongest quarter in the year in terms of both placements and purchases. And we expect in Q4 of this year will again be the strongest quarter of the year in terms of placements and purchases significantly above Q3. Since we don't give quarterly guidance, I'm not going to put out a number. But suffice it to say, we are expecting very strong placement performance in Q4 as we did last year.

Amit Bhalla – Citi

And the SenoSonix piece?

Lloyd Malchow

The SenoSonix, we're quite pleased with the progress that we've made with that system so far. Actually, what I would say is it overachieved our – albeit probably conservative internal estimates on what we were going to do with it. And very optimistic in terms of we're getting a lot of interest from new countries wanting to come in, that are really – do a lot of ultrasound procedures. And although it's still a small part of our overall EnCor franchise I think it's going to become a growing part of capital revenue. And in fact, we're excited enough about the program that we continue to invest in actually new generations of this product and expect over the next number of years to have a series of innovations related to the product. We believe that this is a real market segment. We were very cautious when we introduced it. It was certainly a novel concept. But we think it has legs and it will become a more important part of the EnCor platform going forward. And we're going to continue to develop, in fact, other innovations around it, other generations of the product, so it's here to stay and it's going to carve out a niche within our platform.

Amit Bhalla – Citi

Just to ask you just a quick one or two more. On the gross margin, can you give us a sense of how much of that improvement quarter-over-quarter was attributed to the Brachy – to the Contura platform. And then on Contura, can you also comment in terms of competition rather than folks on Hologic, what kind of impact are you seeing from Ciena and Zoff [ph]? Thanks.

Lloyd Malchow

In terms of the margins, the contribution on the Contura side was material, but not a major part of the gross margin sequential increase quarter-to-quarter. So it played a role, but it was only a piece of the increase. I think it's the way to look at our prospects for continued margin enhancement is to look at Contura as part of the equation, but contributing no more than a third of certainly the improvement that we see quarter-to-quarter, we're particularly optimistic, we're getting a lot of leverage obviously in the fourth quarter. If you have more revenue to leverage off of what is a flat overhead pool and so that certainly plays a factor and we – so we're optimistic about that. Contura will continue, but I would point out that what we're also seeing is the leverage of investments, capital investments that we've made on the tooling side, and our efforts to seek low cost component suppliers are paying off. And that will continue to be part of the equation in terms of continued gross margin expansion. So, I look at it as we have alluded to earlier that this is a multifaceted program, all contributing to improving margin.

In terms of your question relating to the Ciena and Zoff, we do see some activity on the Ciena side. The number of procedures reported used in the public demand are quite a bit lower than ours. We continue to believe that we will accelerate at option, a significantly faster rate. We believe that when we evaluate internally the number of sites that we're in, it's a lot higher in terms of the number of sites, and we believe that our adoption rate once in is going to continue to be higher. Although I will say that I think that that is a niche product that I expect to stay around.

In terms of Zoff, we've seen some first time gaining of some traction in the new sites with the purchase of equipment. Although the places that they are starting to go in are not really cannibalizing the market that we're in. And we think our additive actually to the market rather cannibalizing but we can – what we're internally, we see that they're in somewhere between 15 sites and 25 sites at different rates and at installed equipment. We have always said that we believe that this technology is one that will likely in the shorter term have a slower adoption rate. But in the longer term, it's important because we continue to grow the number of procedures by adding sites that currently don't have HDR after loaders or bunkers, especially in rural areas. So we actually look at Zoff as potentially being able to help grow the overall market.

And just the last thing I'll say is I didn't answer it in earlier part of – third part of one of the other analyst questions related to, do we believe that the business that we're getting now is coming from existing – taking market share, growing the market. Our assessment at this point was is that most of what we're getting is actually gaining of market share and we're not yet at this point where we're growing the overall pie. So we believe the technologies that continue to grow the overall pie are important for long-term, but I have to say that currently the increases we're seeing are coming with market share gains. And that rate is accelerating as I pointed out earlier.

Amit Bhalla – Citi

Thank you.

Lloyd Malchow

You bet.

Operator

Our next question will come from David DeGiralamo from Vertical Group.