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American Medical Systems Holdings,Inc. (NASDAQ:AMMD)

Q3 2007 Earnings Call

October 29, 2007 5:00 pm ET

Executives

Marty Emerson - President, CEO

Mark Heggestad - CFO

Ross Longhini - COO

Analysts

David Lewis - Morgan Stanley

Robert Faulkner - Thomas WeiselPartners

Lenny Shimunov - Aristos Capital

Jonathan Block - SunTrustRobinson Humphrey

Bruce Jackson - RBC CapitalMarkets

Jayson Bedford - Raymond James

Tom Gunderson - Piper Jaffray

Tycho Peterson - JP Morgan

Gregory Weirick - WestcapInvestors

Greg Simpson - Stifel Nicolaus

Chris Safelni

Operator

Good afternoon. My name is Lamont,and I will be your conference operator today. At this time I would like towelcome everyone to the AMS Q3 Earnings Call. All lines have been placed on muteto prevent any background noise. After the speakers' remarks there will be aquestion-and-answer session. (Operator Instructions) Thank you, Mr. Emerson.You may begin your conference.

Marty Emerson

Good afternoon. This is MartyEmerson, President and CEO of American Medical Systems. Welcome to the thirdquarter 2007 conference call for American Medical Systems. With me in the roomthis afternoon are Mark Heggestad, our Chief Financial Officer; and RossLonghini, our Chief Operating Officer. Before continuing, I must preface allcomments with the Safe Harbor statements.

Some of the statements made todaywill be forward-looking and are made under the Safe Harbor provision of thePrivate Securities Litigation Reform Act of 1995. Any such statements are subjectto risks and uncertainties that could cause actualresults to differ materially from those anticipated. Those risks anduncertainties are referenced in today's press release and described in our mostrecent Form 10-K and other more recent filings we have made with the Securitiesand Exchange Commission. With that statement we can move forward with the newscovered in our press release, issued earlier today.

Our third quarter results arereflective of the strong performance across much of the entire company.However, the results are also reflective of the disappointing quarter in our USBPH business. During this call we will accomplish the following objectives.First, Mark and I will share with you the key performance metrics of the thirdquarter. We will be highlighting to you the areas of strong performance acrossthe company, the key sales and operations leadership changes we have put inplace over the past two quarters, as well as articulate the details of ourperformance shortfalls. Mark will also explain the finer points of theamendments to our senior secured credit agreement that we and our lenders haveput in place.

Second, Ross will provide you anupdate on our new product activity, highlighting our robust pipeline, reviewingour clinical studies, and summarizing the physician responses to our newertechnologies. Ross will also specifically address the decisions we haverecently made with regards to the Ovion clinicalstudy.

And third, Mark will provide youan update to our total company guidance for the fourth quarter and full year2007. After the call, we will take your questions. But first, I will ask Markto briefly review our financial performance and then I will elaborate onseveral key components of our business. Mark?

Mark Heggestad

Thank you, Marty. As we reportedearlier today, third quarter 2007 net sales were a $109 million, a 20.5%increase over sales of $90.5 million in the third quarter of 2006. Comparisonsbetween years are impacted by the Laserscope acquisition, which occurred onJuly 20, 2006, and therefore the third quarter of 2006 contained only twomonths of Laserscope revenue. The third quarter of 2007 included $26.0 millionof Laserscope revenue, and the third quarter of 2006 included $18.5 millionLaserscope revenue.

Excluding these Laserscoperevenues, AMS core revenue for the third quarter of 2007 was $83.0 million,which represents 15% growth over the third quarter of last year. The thirdquarter comparison to the prior year's same period includes $1.1 million of favorableforeign exchange rate fluctuations.

The company reported net incomefor third quarter 2007 of $6.9 million or $0.09 per share. This compares to anet loss from continuing operations in the same period last year of $57.9million or $0.83 per share. Last year's net loss from continuing operationsincluded $61.5 million of in-process research and development, which I willrefer to as IPRD. Charges related to the Laserscope acquisition, excluding theimpact of IPRD and certain tax items in the 2006 third quarter, results in netincome from continuing operations of $5.2 million or $0.7 per share.

A reconciliation of 2006 GAAPearnings to adjusted results is included and attached to the financial table inour press release in order to provide a basis of comparability. To provide amore meaningful understanding of our third quarter operations, the prior yearthird quarter earnings information shared in the remainder of this call will beas adjusted, i.e., excluding the impact of the IPRD charge related to Laserscopeacquisition and certain tax items.

The most significant factorimpacting year-over-year comparisons are the incremental costs related to ourfull quarter of Laserscope operations, versus the approximately two months ofLaserscope operations reflected in the third quarter of 2006. The 2007 thirdquarter gross margins as a percent of sales was 77.6% compared to 79.2% in thethird quarter of 2006.

Laserscope gross margins aresignificantly lower then the AMS core business margins, excluding Laserscopeoperations result in gross margins for the core business of 84.7% and 83.9% inthe third quarters of 2007 and 2006, respectively. The 2007 third quarter lasertherapy gross margin of 54.8% continues to fall short of expectation, primarilydue to ongoing warranty related issues, yet continues to show a gradualimprovement each quarter.

Total operating expenses for thethird quarter of 2007 were $66.8 million. Third quarter selling and marketingexpense was $42.3 million, and as a percent of sales was 38.8% compared to34.8% in the same quarter last year.

The 2007 selling and marketingexpense margin continues to be much higher than anticipated due to lower thanexpected revenue combined with significant investments made in the sellingorganization since the Laserscope acquisition.

Third quarter 2007 research anddevelopment was $9.9 million and as a percent of revenue research anddevelopment was 9.1%. Over the long term we continue to target R&D spendingat approximately 10% of revenue.

G&A spending in the thirdquarter of 2007 was $10.1 million, representing 9.3% of revenue and a declinein absolute dollars from the previous quarter. Total third quarter intangibleamortization expense of $4.5 million was right in line with expectation andconsistent with previous guidance of approximately $18.5 million for the fullyear.

Royalty income was $3.5 millionin the third quarter of 2007, the majority of which related to a one-timepaid-up royalty fee from Celsion.

The company ended the thirdquarter with $24.3 million in cash and short-term investment. Capitalexpenditures in the first nine months of the year were $13.9 million. The twolargest capital expenditures relate to the ERP system, which was implementedduring the second quarter, and the recent expansion of our Minnetonka facility.These two items have now been completed and we continue to target our total 2007capital spending at approximately $15 million.

The company paid $20.8 million ofdebt paydown in the third quarter, bringing year-to-date total debt paydown to$48.9 million. Original guidance on debt paydown in 2007 was in the range of$40 million to $50 million and we anticipate we will paydown very little in thefourth quarter, thereby ending 2007 at the top or slightly above the originalrange.

As many of you have recognizedrecently, the difference between our actual results and certain of our creditagreement financial debt covenants has decreased over the past severalquarters. We did pass all of our debt covenants in the third quarter, butrecognizing the continued pressure, we will experience that the financialperformance of recent quarters impact the future covenant calculations. We feltthat it was in the company's best interest to obtain amended covenantthresholds for future quarters on three of our financial covenants. They arethe total leverage ratio, the interest coverage ratio, and the fixed chargecoverage ratio.

The newly amended covenantthresholds are defined in detail in an 8-K we filed earlier this afternoon.Although we continue to target our 2007 capital expenditures to be under $15million in 2007, we also obtained an increase to our 2007 capital spendingcovenants of $16.5 million. I will now turn the call back to Marty.

Marty Emerson

Thank you, Mark. Our third quarterrevenue performance for the company was reflective of solid customer demandacross most of the company and was also reflective of how the sales leadershipchanges we have put in place through the second and third quarter are alreadypaying dividends. The strong customer demand we experienced in most of thebusiness through the third quarter is also evident through the first month ofthe fourth quarter.

Our erectile restoration businessreported near record revenues, slightly above our expectations, as well as asequential increase in its growth rate. The revenue performance of thisbusiness is reflective of the strong customer response for our new 700 MSproducts, our market development programs, as well as the positive physicianand patient reaction to our new LGX product, our enhanced cylinders for penileimplants. For 2007, we expect that this business will continue to grow 12% to16% annually.

Our male incontinence business,likewise, reported near record revenues in the third quarter, also above ourexpectations. As well as reporting sequentially stronger quarterly growthrates, our AUS business recorded very strong year-over-year growth as well asnear record revenues in the third quarter reflecting in part the positivephysician response to our new InhibiZone treated AUS.Our male incontinence business in the quarter was again significantly enhancedby the very strong performance of our new AdVance product. We anticipate thatour male incontinence business will grow in the high teens for the full year2007.

Our core prostate treatmentsbusiness reported results in the third quarter that again included asignificant decline on the year-over-year basis. ASPs in our TherMatrx business remained stable, and we recorded a strongnumber of TherMatrx consoles sold in the third quarter. Nonetheless, wecontinue to fall short of our catheter utilization goals.

For the full year 2007, weanticipate that this business will decline approximately 30% versus 2006. Thethird quarter saw very strong demand for our laser therapy products outside theUnited States. Globally, we sold 71 HPS consoles in the quarter. Importantly,our international business performed fantastically in the quarter.

The decisions and theinvestments, we made early this year about our laser therapy business outsidethe United States, mainly the investments we have made in our internationalsales channels and the changes to our sales and marketing leadership, paidtremendous dividends in the third quarter as our international laser therapy businessgenerated record revenues in the quarter, as well as reporting sequentiallystronger growth rates.

Our laser therapy business in theUnited States was the source of the largest disappointment in our third quarterperformance. Our direct sales team performed well in the quarter, generatingthe same level of revenues in the third quarter as they had in the secondquarter, despite the normal seasonal decline our business typically experiencesfrom the second quarter to the third quarter. This performance was in line withour expectation and also consistent with the significant penetrationopportunity remaining for our GreenLight technology.

However, therevenue that we generated through our network of third-party mobile providers,both physician-owned and non-physician-owned, was significantly short of ourexpectations in the third quarter. The shortfall was attributable in a smallamount to the fact that we sold fewer HPS consoles than we had forecasted. However,the single largest contributor to our revenue shortfall versus ourexpectation was the number of fibers sold to our US third-party distributionnetwork.

This shortfall is primarily aresult of three issues, first to narrow of a focus by these mobile providers onsmaller prostate at the expense of the larger prostate that the HPS technologyallows for. Secondly, some degree of anxiety brought about by our salesleadership changes, and thirdly, a lack of sales and marketing execution on ourpart in supporting these important partners. For the full year 2007, we nowestimate that our total laser therapy revenues will be in the range of $112million to $116 million.

Our female incontinence business,again, successfully built on our market leadership position in the thirdquarter, and generated revenues that were slightly ahead of our already highexpectations. The business generated strong revenues in the quarter, as well assequentially stronger growth rates.

Physician response to our newMiniArc product was very encouraging this quarter and we are excited by itslong-term revenue and gross margin prospects. As well, we believe that recentlypublished data has established the clinical superiority of our Monarc product.This clinical data has been positively received by physicians. As such, we areincreasing our guidance expectations for this business and expect that it willgenerate mid to high-single digit growth rate for all of 2007.

Our Prolapse repair businessperformed within our expected range for the quarter albeit at the lower end ofour range. This business is not yet benefiting from the strong clinical datathat is being generated from various studies and the impact of the improvedmesh and needle designs we introduced earlier this summer. As a result, weestimate that our Prolapse products will generate approximately an incremental$9 million in revenues in 2007 versus 2006.

Finally, our uterine healthbusiness recorded reasonable year-over-year growth rates in the quarter andwithin our expectation. Our investment in additional salespeople very early in2007 to support this business is paying dividend, but our growth rates areslowing. We now anticipate that this business will generate approximately $8million of incremental revenue from 2006.

I will now elaborate further onthe specific aspects of the third quarter performance of our P&L. Our corebusiness reported strong gross margins in the quarter of 84.7%. As Mark, previouslymentioned our laser therapy business generated 54.8% gross margin. Aspreviously mentioned in our second quarter conference call, we are very pleasedwith the significant improvements in HPS console manufacturability andreliability. While the current cost of these consoles are still above ourinitial projection, we again saw sequential improvements in the manufacturingcost for these consoles and in our total laser therapy gross margin in thethird quarter.

Our one fiber guarantee cost alsohave the significant impact on our gross margin. We are on schedule forimplementing several cost reduction and reliability improvement programs forour fibers. One program has already begun and other projects will beimplemented through the few quarters. Looking ahead to the full year 2007, weexpect total gross margin as a percentage of sales to be above 77%.

Our operating income was $17.8million in the third quarter, short of our expectation and following theshortfall on our revenues for the quarter. While our operating performance wasnot at the level we wanted to see in the third quarter, we anticipate that ouroperating margins will show improvement in the fourth quarter, positioning usfor a full year of quarterly operating margin improvement throughout 2008. Thiswill be accomplished through continued improvement in our laser therapy grossmargin and aggressively managing our operating expense base. While we arecommitted to maintaining our investment rates and R&D spending, we willlook to hold our overall operating expense growth to single-digits in 2008, aswe strive to return our business towards its historical profitability level.

At this point, I will now turnthe call over to Ross, to summarize our 2007 new product initiatives. Ross?

Ross Longhini

Thank you, Marty. AMS's new product initiatives are very encouraging. We areintroducing several new products throughout 2007, and additionally we haveseveral exciting new products in our pipeline. As I did in our second quarterconference call, today I have planned to only give a brief update on our fewkey projects.

In our men's health business, wecontinue the global roll-out of the 700 MS penile prostheses.As Marty mentioned earlier in the call, we're also in the early stage ofintroducing our new cylinder system, the LGX. Patients and physicians alike areimpressed with the product's ability to provide a more natural restoration.

Next our AdVanceMale Sling continues to be very positively received. There have been well over2,000 cases performed today. We are comfortably on our way to training morethan 1,000 physicians this year. Encouragingly the AUS also had a very strongquarter bolstered by the launch of the InhibiZone treat atAUS.

We estimatethat we will train approximately 1,000 physicians on a GreenLight system in 2007, as well, the clinical study we initiated tofollow HPS patients for the next five years is well underway. As Marty alsomentioned earlier, our project to reduce the HPS fiber cost is on schedule.Importantly, these fibers will also be considerably more reliable andconsequently would dramatically reduce the financial impact of our onefiber guarantee.

The Continuum radicalprostatectomy anastomosis product is nearing the end of its feasibility studyand is scheduled to enter the next stage of clinical trials later this year orearly next year. A controlled release outside the United States to supportpost-approval procedural data collection is still on track for later this yearor early next year as well.

In our women's health business,we are very excited about the early clinical data for the MiniArcsling and publication of definitive data for the Monarc sling. We also launchedthe new lighter weight mesh for Apogee and Perigee during this past quarter.

At the recent AUGS meeting, thefull compliment of our female stress incontinence and prolapse products werestrongly represented through clinical papers and in-booth presentation, yetanother endorsement of our strong commitment to innovation and patient outcome.

Our neuromuscular stimulationdevice [Accessa] is progressing very well and will bereleased in select markets outside the US in early 2008. We'll have aninitial focus on treating interstitial cystitisfollowed by a work to support a clinical indication for urge incontinence.We anticipate that we will begin enrollment in our pivotal US trials for urge incontinence in women by the second quarter of 2008.

Finally, I'd like to give a quickupdate on the Ovion clinical trial. As a reminder, the Ovion product is aminimally invasive permanent birth control device that works by including in fallopiantube. To date, we have enrolled close to 200 patients in this clinical trial.Early results showed an occlusion rate that was not inline with our anticipatedoutcome, and as a result, we suspended enrollment in the clinical trial thispast June.

After working with severalexperts in this field we made a slight procedural change, conducted the recentthree month radiographic assessment and as a result saw significant improvementin the occlusion rate. However, we are still marginally below our target anddesign changes are already underway. Impact on the timing and structure of theclinical trial are currently uncertain. In keeping with our past practices, wewill not provide any detailed clinical result while the trial is ongoing.

Finally, although we aredisappointed in our short-term result, we now have clinical information thatsuggests that the Ovion product will be an effective choice for women seeking ahighly tolerable, minimally invasive, permanent birth control option.

We continue to be very excitedabout the products we have in our pipeline. As we have mentioned on othercalls, several of these products have the potential to generate over $100million of revenue annually once they become more mature. We also have afantastic stable of near-tem projects that will continue to keep the portfoliofresh. Marty?

Marty Emerson

Thank you, Ross. Despite thechallenges of the past year, as we look forward to 2008 and beyond, we areencouraged by what we see. We recently bolstered the senior leadership ranks ofour operations team. Also, as I mentioned earlier in this call, we haverestructured much of our global sales leadership team throughout the second andthe first few weeks of the third quarters.

These changes are all beginningto have a positive effect on our business. This has been primarily seen inimproved sales execution and transparency and outside the United States in amore predictable capital equipment sales pipeline.

At this time I will turn the callover to Mark to review our financial guidance. Mark.

Mark Heggestad

Thank you, Marty. The companycontinues to be hampered by the ability to drive anticipated consistent andsustainable laser therapy growth across all geographies, combined with spendinggenerated by early investments in the selling organizations. Reflecting thethird quarter results and recognizing the difficulty of predicting when and towhat degree we will see increased stability in our laser therapy revenue growthacross all geographies, we are adjusting our 2007 guidance as follows. For thefull year 2007, we will estimate that revenues will be in the range of $458million to $464 million. This results in fourth quarter revenue guidance of$124 million to $130 million.

Our new guidance reflects thecontinued strong results we are experiencing in the majority of our corebusinesses, tempered by cautions on the laser therapy business. We anticipateearnings per share from continuing operation for the full year 2007 will be inthe range of $0.40 to $0.45 and for the fourth quarter to be in the range of $0.15to $0.20. Marty?

Marty Emerson

Thanks Mark. Thank you for yourattention. I would now like to open up the call to questions. Lamont, ouroperator, will instruct you on how to be queued to ask questions. Lomache,?

Question-and-Answer Session

Operator

(Operator Instructions). Yourfirst question comes from the line of David Lewis.

David Lewis - Morgan Stanley

Hello.

Marty Emerson

David.

David Lewis - Morgan Stanley

I am sorry, a little technicaldifficulties here, I apologize guys. Couple of quick ones here. Marty, I guessyou made some comments about the success of the sales and marketing structurein both US and Europe, more specifically in Europe. Even though revenue islittle lower than we are looking for this quarter, sales and marketing wassignificantly higher. Could you identify on an absolutely basis where more ofthat spending came from? Was it just a real re-staffing up in Europe or was itUS or other items?

Marty Emerson

Maybe you are talking aboutabsolute dollars from Q2 to Q3.

David Lewis - Morgan Stanley

Yeah. Just looking at the revenueline it look like sales and marketing was actually heavier given where therevenue came in, and I'm wondering where that spending came from. Was it moreUS, was it more Europe, was it tied to Laserscope or did it come from someother area of the business?

Marty Emerson

It was more US thaninternational. It was not tied to Laserscope, it was -- and then there was noreal significant one-line item initiatives, David. So, I mean, nothing real specificallyin terms of a change from Q2 to Q3.

David Lewis - Morgan Stanley

Okay.

Marty Emerson

And in fact the leadershipchanges that I'm talking about, there was no real incremental P&L effectone way or the other on those changes.

David Lewis - Morgan Stanley

Okay. So Marty, in terms ofLaserscope for the US market, you're basically saying that you think demand isstill strong in the US business and even though with that the US -- the mobilesystem did not come the way you thought. So, can you just talk about what youspecifically think is happening on utilization on the mobile side and why youare still confident that US demand for Laserscope or overall market penetrationis not at a level of near term saturation?

Marty Emerson

Yeah. It goes to the work we'vebeen doing to really understand the size of prostates more or so than anythingelse, David. The data we've been collecting from our mobile provider partnerswould suggest that the vast, vast, vast majority of their procedure are focusedon prostate sizes that are less than 50 grams, well under 50 grams. And, yeah,we know that there is only that prospects under 50 grams represents only about50% of the market in terms of the opportunity, in terms of the total number ofinterventions that are delivered. And I think that goes to also -- reallystarting again from a procedure perspective, from a clinical perspectivehighlighting the differences between the historical or legacy PV technologyversus the strength of the HPS technology that we think we will begin to startto realize.

David Lewis - Morgan Stanley

What could we think about interms of US market growth? Do we think 15% is reasonable, do you still thinkyou can get over 20% growth in the next 12 months in the US market forLaserscope?

Marty Emerson

I think that if you look atpenetration trajectories, David, one I think could easily come to conclusionthat you should be looking at something close to 20%. If you look at revenueperformance and the struggles that we've had to consistently generate strongrevenue performance in the United States, is probably going to be somethinglower than that.

But given as well our continuedconfidence that our end-gain penetration goals, we think are very reasonableand consistent with the clinical benefits of the product, we are talking aboutmaybe a lower slope, but over a longer amount of years.

David Lewis - Morgan Stanley

And then maybe just two morequick ones, I'll jump back in queue. The first is the countries thatoutperformed in Europe on Laserscope, are those countries you've mentionedsimilarly in the past couple of quarters over those new markets? That wasnumber one.

And number two, can you talkabout the increase in your male incontinence business, so there is AdVance or AMS, of the increase in revenue, can you break it upinto percentages between AdVance and 700?

Marty Emerson

So the international growthreally was very well balanced in terms of what came out of Europe, what cameoutside of Europe and as well equally balanced within our direct markets, themarkets where we've had a direct presence versus the markets where we arereestablishing a direct presence. So, it was actually very well balanced,nicely balanced across the globe and very clearly we're very, very pleased withthat.

In terms of the male incontinencenumber, Ross do you have off the top your head, how that went? I mean thegrowth rates were higher obviously because of AdVance andthe AUS. But, AUS business nonetheless was again was again aconsistently strong performer.

Mark Heggestad

No, in fact the AUS business wasfar exceeded our expectations and is one of the highest growth quarters we'vehad in several quarters. So, we received great contributions for the AdVance, combined with extremely strong growth on the AUS.

David Lewis - Morgan Stanley

Okay. Well thank you very much.I'll jump back in queue.

Operator

Your next question comes from theline of Robert Faulkner.

Robert Faulkner - Thomas Weisel Partners

Hi, guys. Thanks for taking thequestions. I just wanted to follow on the mobile provider dynamic. To whatextent is there a risk that they're going to some other provider? And I'mwondering why it might be new that they're treating the smaller prostates andhow that would have factored in to a growth projection. So, if there is any wayI can elaborate on the question, if you need?

Marty Emerson

I'm not sure I fully understoodthe first part of that question, Rob.

Robert Faulkner - Thomas Weisel Partners

Yeah. Mobile providers, first ofall, is that where you saw the underperformance came from. To what extent areyou sure that it's not that they're going to some other vendor of laser or someother modality?

Marty Emerson

Okay got it. No, I am veryconfident in that. We've always had, going back to the days of Laserscope, areally tight relationship across a handful of physician-owned providers andbusiness-owned providers. And with the time that we've spent with them over theyears or the time we've spend with them over the last four, five weeks still feelvery confident that we know and understand fully their commitment to thebusiness and their commitment at the Laserscope technology. I mean, as sucharen't overly concerned about any risk of them going to competitivetechnologies.

As to the second part of yourquestion, it's been really interesting as we dug into really understandingphysician's use of laser technology and how that also impact the mobileprovider business. I think for a long, long time and there is actually beensome survey work done that reinforces this for a long time, I think there wasthe view that laser therapy was a wonderful technology for prostate that wereupwards 40 grams, 50 grams in size and it was always presumed naturally thatanything above that was a gram size that would be more appropriate for atraditional turf And so, as we've gone out and worked with more physicians andwork with academic centers on our own, as well as working with mobileproviders, it's become obvious to us that we are also in a position of nicely remindingeveryone that HPS technology allows for a much different clinical approach forpatients who have prostates that size wise are well in excess of 50 grams. Andit's just an education and awareness and a market development effort, more thanit is I think anything else, Rob.

Robert Faulkner - Thomas Weisel Partners

Okay, I guess I may be a littleslow here. I am just trying to understand why mobile providers were actuallybelow expectation? What is about your sales and service or whatever are thevariables there might be that might have let it be below expectation?

Marty Emerson

I think part of it goes to and aminimum, the changes we are making in our sales leadership would have made someof those providers a little uncomfortable as to what it meant for them. That'scertainly consistent with the feedback that we've gotten from them. I thinkthey all took the approach wanting to see how these changes were in play outand what types of people we're showing up on their door step and the types ofrelationships that we were trying to establish. There was also, and well Ididn't put in the commentary, we did get some feedback from some of the mobileproviders of a little bit of concern around what's going on with Stark III andis Stark III a real threat to them in terms of being able to maintain aposition own. That's a very difficult one to quantify, but certainly there wasnoise level around that as well.

Robert Faulkner - Thomas Weisel Partners

Okay. And maybe you couldelaborate on sales leadership and kind of what made them nervous specifically?Obviously, when you bought the business you talked about de-emphasizing mobileproviders in the context of the business and as a whole. Were there otherthings that might have made them nervous?

Marty Emerson

No, nothing beyond the fact that,we're talking about changing some relationships that have been in place for along, long time and I mean measuring years…

Robert Faulkner - Thomas Weisel Partners

Yeah.

Marty Emerson

And that in itself can sometimecreate some anxiety when you combine that with the fact that we've been verypublic about the same. We wanted to build the direct presence and build deeperrelationships within end users and I think it's nothing more than that.

Robert Faulkner - Thomas Weisel Partners

Okay. Would you care to elaborateon the management changes throughout the organization, sounds like they wereconsiderable?

Marty Emerson

Not a tremendous amount. We hadsome folks who chose to leave the organization, and we took that as anopportunity to put in place some folks also staying within the organization,going, reaching back right into the beginning of the second quarterinternationally and in the US sales organization in the third quarter. And boyI'll tell you look at, what we were able to accomplish internationally in thecore and in Laserscope and then here in the US on the core part of thebusiness, and I certainly feel really good with the change that we put inplace.

Robert Faulkner - Thomas Weisel Partners

And finally, myback-of-the-envelope calculation is that the fiber prices were down thisquarter? Am I doing that right? And if so, why would that be?

Marty Emerson

Yeah. They are not down. The 8-Kthat we put is going to show a decline in ASP, but it really is driven by threethings mix always, right. And in this case specifically mix of ourinternational business versus US business, because in the markets where we'vestarted to build the direct presence, we've seen a nice pickup in ASP. But,still the vast majority of our international business comes from ourdistributor market.

And then thirdly, is the factthat the one fiber guarantee the way it has been accounted for historically andthe way we continue to account work with the acquisition is it is actuallyshown as a reduction to the ASP. If you take out mix and take out the one fiberguarantee, actually fiber ASP didn't move. At the point of sale to a customerthere was no change in anyone's fiber pricing from the second quarter to thethird quarter.

Robert Faulkner - Thomas Weisel Partners

Okay, thanks. Thanks.

Operator

Your next question comes from theline of Lenny Shimunov.

Lenny Shimunov - Aristos Capital

Yes. Thanks for taking myquestion. So, still I'm just not clear in terms of what's going on with the mobilizersand if you guys were already putting some of those initiatives in place, thenwhy was that not contemplated in your guidance?

Marty Emerson

Our guidance contemplated thefact that our first two quarters of 2007 were off to a great start in theUnited States, you've heard everyone sort of being talk about that. We hadgreat growth over the first six months of 2007. We got off to a reasonablestart in the third quarter, which is one we set our guidance.

But, the vast majority of capitalintensive business happens at the end of a quarter, more often than not overthe last few weeks of the quarter. And anytime we put together a guidance forany capital business, we're looking out to see what we anticipate will happenover an entire thirteen week period, even though the reality is that we'rereally trying to gauge intensity of the last two weeks.

Lenny Shimunov - Aristos Capital

Okay. But is it fair to say thatin terms of the shortfall, is it at all fibers or how much is it possible tobreak it down fibers and consoles or you don't think about it that way?

Marty Emerson

No, we do think about it thatway.

Lenny Shimunov - Aristos Capital

So…

Marty Emerson

I would rather not get intodetails. There were aspects of both.

Lenny Shimunov - Aristos Capital

Okay. All right. Thanks.

Operator

Your next question comes from theline of Jonathan Block.

Jonathan Block - SunTrust Robinson Humphrey

Hey guys. Just first question, Iwas actually about to ask you question on the ASP fiber, I realized yourcomments about the mix. But, maybe just sort of two-fold. One, could youprovide some directional color, if you would, on how it shakes out US versusinternational, because just looking at the AK, I mean there's a pretty big stepdown sequentially.

Marty Emerson

Yeah. The other thing that's inthere Jonathan, is that we had significantly higher one fiber guarantee impactin the third quarter, or is a magnitude higher then in the previous quarters.And that's kind of blended in that, so it's hard to see it. But, that had asignificant effect, as well as I said earlier just the significant ASPdifference between our distributor markets outside United States and our USmarket.

Jonathan Block - SunTrust Robinson Humphrey

Okay. But, can you provide us wherethe distributor markets OUS shakes out versus US market?

Marty Emerson

You mean in terms of ASP's?

Jonathan Block - SunTrust Robinson Humphrey

Yes.

Marty Emerson

Yeah. They would be kind of inthe $300 to $400 range versus in the US six plus.

Jonathan Block - SunTrust Robinson Humphrey

Okay, perfect. And then just,Marty, when do you expect that one fiber guarantee to start to reverse itself?I think you mentioned the manufacturing was on track, is that a 4Q '07 or isthat something that we're likely to start seeing in the first half of nextyear?

Ross Longhini

John, this is Ross. We're goingto see that in the first half of next year, there are number of changes that weare making to on the design of the fiber and how we are manufacturing that. Andthose changes, it's not one change that's going to impact reliability, it'sseveral changes that we are making. Those changes, some of them have beencutting already, some of them will be cutting yet this quarter, some of themwill cutting through the first quarter and some of them are planned for thesecond quarter. So, when we'll see a significant change, we believe when westart leading all of the inventory out and replacing with these new fibersthroughout the first half of '08.

Jonathan Block - SunTrust Robinson Humphrey

Okay, great. And just one more,Ross, well I've got you. Just a question on Ovion, it sounds like youimplemented some changes, the occlusion rates improved, but are still belowplan. So, where do we go from here? I think you mentioned some more changes andthen do we take another look or because we are going down the road of I guessadditional procedural changes, do you need to restart the trial and go throughthe IRB etcetera.

Ross Longhini

Yeah. Right now we are looking atimplementing changes to both the device and the delivery system. We don't knowwhat impacts that will have on the clinical trial. As you can imagine thatusually ends up in bit of a negotiation with the FDA. Certainly one possibilityis that the patients that we have already maybe able to be included in thetrial to provide our long-term follow-up and then we'll make these changes andwe would attempt to convince the FDA that we would be able to use the newerpatients, if you will, and the remaining 400 or so as the shorter termfollow-up. But there certainly will be discussions, serious discussions withthe FDA about how we go forward, and it may resolve in an avenue to start thetrial over.

Jonathan Block - SunTrust Robinson Humphrey

Okay, great. Thanks guys.

Operator

Your next question comes fromline of Bruce Jackson.

Bruce Jackson - RBC Capital Markets

Hi, guys. Couple of morequestions on Ovion. In terms of the changes to the device, is it similar enoughfor you might not have to restart the trial or what makes you believe that youcan possibly carrying on with only a slightly revised time line?

Ross Longhini

The thing that we're talkingabout, I mean the changes that we are contemplating right now are rather minorchanges on to the device is what we believe will be the case. But, nonetheless,whenever you're talking about an implant with the FDA they tend to look at it-- view it quite conservatively and understandably so. So, if you make anychanges whatsoever the FDA can say you must restart the trial, any change. Andso, consequently that maybe a possibility, but we're still looking at basicallythe same design that we have had before, maybe some minor shape changes.

Bruce Jackson - RBC Capital Markets

Okay. And then in terms ofLaserscope, is there anything in the market that, for example, was there anyseasonality or any other types of market conditions that would have caused therevenue to do what it did?

Marty Emerson

Bruce not that we are aware of, andI know I point to how we did in with our direct sales force calling on hospitaldirectly in the quarter. I mean, obviously, there is seasonality in ourbusiness, I mean that's given. And you can see that everything trended downslightly for us. But, we did quite well with our fiber sales inside UnitedStates, calling on hospitals, and anticipated with the momentum behind the HPStechnology and the penetration push that we were on, that we would have seensimilar type of results through our partner's business.

Bruce Jackson - RBC Capital Markets

Okay. And then you mentioned thatyou were still working through some of the warranty issues? Did that caused anykind of supply constraints?

Marty Emerson

No.

Bruce Jackson - RBC Capital Markets

Okay. And then with the US versusthe international pricing, you recorded the distributor pricing, what's the blendedinternational ASP range?

Marty Emerson

It's in the mid to high 5s.

Bruce Jackson - RBC Capital Markets

Okay. That's it for me. Thanks.

Marty Emerson

Yeah.

Operator

Your next question comes from theline of Jayson Bedford.

Jayson Bedford - Raymond James

Hi,Good afternoon. I have a few questions. First just onyour US Laserscope business, is there anyway to breakout what is derived fromyour direct sales force and from your third-party?

Marty Emerson

I think we are going to stay awayfrom that Jayson. Certainly, we are very comfortable. We obviously know it, welook at it pretty regularly. We came into the year with it be roughly one-thirddirect, two-thirds indirect and we have been consistently working to move thatup to something closer to 50/50 or more by the end of the year and are on trackto be able to do that.

Jayson Bedford - Raymond James

Okay. And then I wasn't fullyclear on, in terms of the one fiber guarantee, why did that have such a bigimpact on ASPs this quarter versus last?

Mark Heggestad

Jayson,this is Mark. A couple of things first of all, the reason it impact ASP is wayit works through our calculation. We count that fiber as it goes out of thedoor as a unit, but obviously it goes out at zero cost. So, it brings down theASP dramatically.

Quite honestly, I think as muchas anything we're getting better and better exposure to our one fiber guaranteein the number of units that are really going out the door under this guarantee,as we are put our new ERP system and we're getting better and better data outof that ERP system.

So, quite honestly it may not beso much that it's necessarily deteriorated as we're just getting betterexposure to the total number of units that are going out the door underneaththis program.

Jayson Bedford - Raymond James

Okay. I guess just looking to thefourth quarter guidance it implies revenue growth of about, let's call it,seven to about 13%. It looks like it implies a little bit of step- up here inLaserscope business. I think just using your full year estimates I get to about$31 million on the low-end, $35 million on the high-end, which seems like a bigstep-up from the September quarter, and then the offset is your base businessseems to slow into the high-single digit. So, if you could just speak to bothof those issues in terms of the fourth quarter revenue guidance?

Mark Heggestad

Yeah. I mean, Jayson you areprobably right, the core business we have between the 10% to 15% range in thelaser therapy also in that range, but slightly higher. I mean, there's a lot ofways to talk at this as it's difficult when you are looking at it from ayear-over-year role in really understanding what was in our fourth quarter baserevenue last year. And so, the growth rate is actually down. The growth ratesthat were suggested in the guidance are actually down significantly from whatwe've been running here in the first nine month. And again, as I had mentioned,that's probably as much anything as just temporary caution in really trying tounderstand what was in Q4's base business last year.

Jayson Bedford - Raymond James

And I guess, I am just curious,irrespective of what you did last year $31 million in fourth quarter Laserscoperevenue at the low-end seems to be, obviously, the highest revenue quarter ofthe year. I am just wondering what's fueling that?

Mark Heggestad

Well, first of all rememberfourth quarter is always the highest revenue quarter. It always has been forour core business and it always has been historically for Laserscope'sbusiness. So, you have that natural seasonality that takes place. Q3 is alwaysnatural lower quarter. Given the shortfall we had here in the third quarter, weknow we are going into the fourth quarter with the opportunity to look atinventories of our customers that are probably significantly down from theyhave been naturally running in prior quarters.

Jayson Bedford - Raymond James

Okay. And just lastly twoquestions on the women's health business, first on the endometrial ablation,are you seeing just a longer selling cycle or is this a function of increasedcompetition into the office?

Marty Emerson

It's all of those things, Ithink, Jayson. We have been, right, we've been talking about this one for acouple of quarters now, where certainly there is a lot more interest from ourcompetitors being in the office and physicians know that, so they are spendingmore time looking at different technologies. But, we've also been encouraged bythe work we've been doing from utilization perspective and our ability to movethe needle a little there. So, the characteristic of our Her Option business inmany respects haven't any changed. It's a nice little business that we have,helping us learn a lot about the office, getting us closer to a lot ofgynecologist who don't necessarily do a lot of surgery and it hasn't changeddramatically in that respect.

Jayson Bedford - Raymond James

I guess a similar question on theprolapse side. It looks like you've brought the guidance down a couple oftimes. Is it a function of increased competition or is it just slowing in themarket?

Ross Longhini

Jayson, probably both again. Imean there is certainly more competition out there, but that's just sustainedour growth in market like this. I actually think that the bigger reason for ourreduction there is -- we're in the plateaued phase that we talked about beforewhere people are waiting for the longer term data. The people that would relyon the rather short-term data that's out there in the marketplace are the onesthat are using it, those physicians are already onboard. And then there isstill a lot of debate about using draft augmented repairs in prolapse surgery.And so, there is a lot of docs out there still saying I want to wait untilthere is four, five year data out there and we're right in the middle of thatdata collection period itself. I think it will reaccelerate growth once moredata is available to be out.

Jayson Bedford - Raymond James

And Ross, when do you expect thenew data?

Ross Longhini

You get five years of data, weare three years into it. So, we still have couple of years to go.

Jayson Bedford - Raymond James

Okay. Thanks. I will get back inqueue.

Operator

Your next question comes from theline of Tom Gunderson.

Tom Gunderson - Piper Jaffray

All right, good afternoon. Mark,a quick one. What's the cost of the amendment?

Mark Heggestad

Quiet honestly, we had a verygood working relationship with our administrator and creditors. They wereextremely supportive as we went through this process, and basically we've had aone-time customary fee, and there is no impact to our ongoing interest rate.

Tom Gunderson - Piper Jaffray

And what was the fee?

Mark Heggestad

We are not going to release atthis time, but obviously it's not material enough that we're talking about it.

Tom Gunderson - Piper Jaffray

And in August, I think, becausewe were all swirling around is the cost of a prophylactic amendment, if youwill, was estimated by you guys as being $500,000 to $1 million, is that aproper range?

Mark Heggestad

Yeah.

Tom Gunderson - Piper Jaffray

Okay. And then Mark, as long asI've got you, I'm going to push back a little bit on the customer inventoriesbeing depleted in Q3, I think is that on laser fibers?

Mark Heggestad

Yeah. And Ididn't say they are depleted, but I believe that we have a lot of opportunitygoing into the fourth quarter.

Tom Gunderson - Piper Jaffray

Well, giventhat you ran out in Q1, and were running off of chunk inventory in Q2, and Q3was weak, it's hard to believe that there is a whole lot of change ininventories in you US customers at least?

Mark Heggestad

You're talkingabout customers in the quarter Tom?

Tom Gunderson - Piper Jaffray

Yeah, yeah.

Mark Heggestad

I don't thinkwe're running out of trunk, as we are going through the last half of Q2.

Tom Gunderson - Piper Jaffray

Okay. Andspeaking of surprise, just tell us once again you're at full inventories, nosupply problems across the board?

Mark Heggestad

That iscorrect.

Tom Gunderson - Piper Jaffray

And then,let's see, on US versus international on laser you gave in the 8-K, you're notgoing to say on US, in the US on lasers mobile versus direct other thanapproaching 50-50 by the end of the year, is that right, Marty?

Marty Emerson

Yeah. That's still our targetTom.

Tom Gunderson - Piper Jaffray

Okay. And then just kind ofoutside the box, kind of, question, but Intuitive Surgical has been talkingrecently about their success and ramping up on a prolapse procedure with daVinci robot. Have you been seen any competition out there with some of yourgynecologists trying a new method for prolapse repair?

Ross Longhini

They would still be using, Ibelieve anyway, I mean that everything that I've seen so far is da Vinci wouldstill be using a some kind of a graft augmented repair.

Tom Gunderson - Piper Jaffray

Right. They would be using amesh, right, but they may not use the whole kit?

Ross Longhini

Right. They might not use the wholekit. So, whether or not they are cannibalizing much of that, I don't know. Wesee it in very few centers right now, but it's something we are certainlypaying close attention to as how could we potentially capitalized on any gainsthat they make with them.

Tom Gunderson - Piper Jaffray

And then I know, we've tried toget a clarity on this a couple times and can't be clear till later, I guess, sobe it. But, the mobile providers on the laser side have had their biases beforethe acquisition and yet now in Q3 it seems like it's an issues on only under 50grams. Is there something that exacerbated that in Q3 or where just you guysjust finding out as you get more data flow that that's one of the issues outthere?

Ross Longhini

It's not new information. It maybe new in that. We haven't had a lot of information here to pour on, what sizeprostates were being treated. The indications are that they are treating moreand more of a larger prostates and this is very encouraging for the business.The reason that we were off in Q3 with the US mobile providers had nothing todo with what size prostate they are treating. They are going to be treatingmore and more other larger prostate as we go forward, but the opportunity isstill is very significant to treat more of the prostate instead of going TURPfor the larger one.

Tom Gunderson - Piper Jaffray

Okay, and then I think that's it.Thanks guys.

Operator

Your next question comes from theline of Tycho Peterson.

Tycho Peterson - JP Morgan

Hi,thanks for taking my call. Looking at the numbers quickly if we take guidanceright after the fourth quarter and I think you already about the Laserscoperamping. Is something here that the [close] is going to slow a little bit, I'mjust trying to reconcile that with the mid products slow and the ramp of that700 MS and AdVance and MiniArc.

Mark Heggestad

Yes,sure. Pardon me.

Tycho Peterson - JP Morgan

Sorry, goahead.

Mark Heggestad

Yes as welook at the fourth quarter, I think the main thing to this is, our fourthquarter last year was very strong in a lot of our core businesses. And althoughwe always assume there is a level of seasonality and that we'll have a verystrong quarter each fourth quarter. Again I think we temper a little bit justunderstanding the level of seasonality. We will be anniversarying on therelease of our AMS 700, we'll be anniversarying on AdVance although AdVancedidn't really get legs under itself later in 2007, but nevertheless as we lookat a lot of the kind of unknown in terms of these anniversarying, and as welook at how strong the quarter really was last year, we've just temper ourgrowth rate to little bit as we look going forward into this fourth quarter.

Tycho Peterson - JP Morgan

Okay. Youtalked in the past a little bit about some of the kidding issues around the 700MS and those are all resolved?

Mark Heggestad

Yeah,that was primarily a first quarter issue and we haven't had any issues aroundthat since.

Tycho Peterson - JP Morgan

Okay. Andthen I guess just in terms of the overall market, I mean it sounds like you'resaying you're on target for a 50-50 split direct indirect in U.S. a year-end.How large is the mobile market overall for the industry in the US right now,what percentage, if you could guess?

Marty Emerson

Tycho, Icouldn't, I don't know.

Tycho Peterson - JP Morgan

Okay.

Marty Emerson

It'sobviously very big, but I don't know.

Tycho Peterson - JP Morgan

Okay,that's it. Thank you.

Operator

And yournext question comes from the line of Gregory [Weirick].

Gregory Weirick - Westcap Investors

Yeah, hi.I guess my question really revolves around overall company execution thatreally sense the Laserscope acquisition execution has been kind of spotty atbest. There is kind of one reason or another that you guys keep missing [quarters].So can you talk about kind of overall responsibility for the company executingand what you're doing about making it a better company, that can get back tokind of hitting its numbers and moving forward again?

Marty Emerson

Sure,this is Marty. I talked a little bit about it on the call. We had a rough firstquarter if you remember from the supply chain perspective, we've put a lot ofpictures in place, some of which shows up in the balance sheet as increasedinventory, some of it goes to things we've done internally around taking avery, very, very aggressive approach to our demand planning and kind of betterunderstand other variances in that. And then as well some of it's related topeople in terms of bolstering our leadership team with more people and we talkedabout that on the call. And it feels comfortable that we've put that one to bed.

If youlook at sales execution, again as I referenced on the call, we've actually putquite a few changes in place going back a long time, and have dramaticallyincreased the investment in leadership up by the United States and that iscertainly manifested itself in a really strong quarter, very strong across thebusiness not just Laserscope. Very strong second quarter, strong third quarter.

Thechanges that we've put in the U.S. sales leadership team are just now beginningto show themselves. There were some changes we put in place based on someinsights we had into the business throughout the second quarter. We put somechanges in place as we went through the third quarter, some of which I thinkpositively have shown themselves in terms of the strength of the execution ofour core business through the third quarter. But candidly some of which havenot yet really are borne through, and I don't need to look any further than theU.S. BPH performance in the third quarter.

So theshort answer is, we have been aggressively addressing the performance issue aswe see them, and are comfortable that the list of potential problems andconcerns is dramatically reduced when we came into 2007.

Gregory Weirick - Westcap Investors

Okay.

Operator

Your nextquestion comes from the line of Greg Simpson.

Greg Simpson - Stifel Nicolaus

Hi,thanks guys. Let me go back to ASPs here. First of all on console ASPs seemedabnormally high as well. I wondered if there are any connections betweenconsole ASPs and fiber ASPs may be with respect to the level of purchasecommitment when you buy a console, anything along those lines that would skeweither of those numbers?

Marty Emerson

No, Gregit's mix. Console ASPs we've always known since we've acquired the business atthe ASPs outside the United States are higher than the ASPs inside the UnitedStates, and some of that uptick in international performance in the thirdquarter came from selling consoles. So it's mix, we haven't changed list pricein any market, and we haven't changed our discounting in any market. We had afewer trade-in in the third quarter than we had seen in previous quarters. Sothat certainly positively affects ASP but it was more geographic mix thananything else.

Greg Simpson - Stifel Nicolaus

Okay. And then can you guys givethe specific US fiber ASP, you gave us a blended international ASP, can yougive us the specific US number in the third quarter. Max I'm having troublereconciling the numbers here. If the blended international ASP was 575certainly historically the US ASP been higher then that, unless the missingpiece obviously, unless Mark you can quantify the impact of the one-fiber issuein the quarter.

Marty Emerson

Greg, we wantto stay away from market specific ASPs only because that's a big competitiveissue that we'd rather not share obviously. But I'll leave it simply withouttrying not to appear to be absolute here, that we had a much higher impact justin terms of actual units of the one fiber guarantee in the third quarter thanwe had seen in any of the previous quarters.

Greg Simpson - Stifel Nicolaus

Well, Marty,if I could ask that in a different way then, without getting into specificnumbers. If you take out the one fiber issue, was there any trend in the USfiber ASP in the third quarter versus the last couple of quarters, any significantdifference?

Marty Emerson

Yeah surein the US, if were to net out the one fiber guarantee, we'd be right back inkind of the normal bandwidth and bouncing around in the United States for ASPs.

Greg Simpson - Stifel Nicolaus

Okay,great that answers that question. Mark, inventory levels look extremely high isthere an issue in the third quarter, is that continued inventory build or justsomething else that work here.

Mark Heggestad

Greg obviouslyvery good point. Primarily three things that are driving inventory build. Asyou know since the first quarter we have increased our levels of inventory justin terms of maintaining safety stocks etcetera, and long term we do indeedintent do bring those down as we put other mechanisms in place to assure thatwe don't have supply issues but that continues to be one time.

Thesecond item is, if you do look at our inventories at the end of most thirdquarter, there is uptick in inventory, simply because we are trying to levelout our plans as we prepare for the high volume fourth quarter we've alwayshistorically have experienced, and so there is a seasonal up tick you see inthe third quarter as we prepare for that.

And thenthe third item that's impacted us is that as Marty was mentioning, especiallyon the capital side, a very significant proportion of our revenue comes towardsthe end of the quarter and as we missed our revenue, we are just left with thatinventory on the books. So those are three things that drove that inventory herethis quarter.

Greg Simpson - Stifel Nicolaus

Okay. A final question then andI'll kind of piggyback off that answer to some degree, the fourth quarterguidance going back to that. Specifically the suggested growth rates in thecore business, acknowledging the strong year-over-year comp here, the growthestimate in the core business almost seems inconsistent with the trends in thecore business in the third quarter now that we've got some of this earlier yearissues out of the way, as well as the fairly rosy fourth quarter outlookpresented on the second quarter conference call.

So, I guessmy question is, are you guys under the circumstances given kind of the seriesof disappointments this year. Are you guys discounting essentially everyconceivable disappointment that could occur and just kind of throwingeverything out here. I am not asking if you are low bowling that's under thecircumstances obviously, that's not the right way to put it. But is thatapproach you guys, probably obviously should have take earlier, but is thatwhere we are finally at.

Mark Heggestad

Greg Idon't know, maybe let me answer it a different way. The way I would look at itis, as I had mentioned in an earlier question that was somewhat similar to this.There are a lot of unknowns, right. There is a lot of unknown in any quarter,but I think as we go into fourth quarter there's probably as many unknown aswe've ever had.

Numberone, we've had some volatility in Laserscope internationally over the firsthalf of the year, now we had some volatility in Laserscope in the US. In thethird quarter, we did have a very strong fourth quarter last year, we'reanniversarying on a number of key products. But I think the key to all this is,there is just a lot of unknowns that make it, that do make it difficult topredict this exactly. And given those unknowns, where we had to make estimatesor make a prediction, at least we try to make sure, we avoid it assuming thebest in every case, that's for sure.

Greg Simpson - Stifel Nicolaus

Alright.Thanks guys, that's it.

Operator

And yournext question comes from the line of [Chris Safelni].

Chris Safelni

Goodafternoon. Mark, I am still struggling a little bit. While I can appreciatethat you are launching improvements of certain new products and the challengesyou've had in the Laserscope integration and launches and supply chain issues. I'mstill trying to get arms around. You've been in this business for long time,you've been in and around the customer base, basically the whole entire historyof the company, I can't figure out whether it's the fact that the way in which youdo your internal forecasting is going through an evolution, and that combinedwith a new ERP system generates these kinds of fits and starts where certainprojection seem to be right on the money or maybe the results exceed yourexpectation in another parts of the business, suddenly you find that there issome sort of surprise.

Help meunderstand how that can happen when the internal systems that you have i.e. theERP system is presumably giving you better information than it would otherwiseif you didn't have that particularly ERP system in place, and/or are themarkets themselves you are shifting, and/or the product lines in competitionshifting in ways that are just catching you by surprise?

Mark Heggestad

Okay. Socouple of parts to that, I think first of all you're right. There is no doubtabout it, as we go through this processes there's two things that are certainlyhelping us gain more and more confidence in our ability to predict.

One is,is our ERP system. You know, we get better and better data each month, but Ithink probably part of what I would say is wrong in your conclusion is, despitethe fact that we now have four months under our belt with the new ERP system,we have a long way to go.

There isa huge opportunity and potential for us, and in each months we gain more andmore insight and leverage that system more and more and we're much better uptoday than we were a quarter ago, and certainly we are better that we were twoquarter ago. So this is an evolutionary thing with the new system, and I thinkwe are getting more and more data to allows us more and more predictability.

And ifyou take a look at where our guidance has been and where our misses have been,we have been pretty close on the core side of the business where we have themost experienced, and the most difficult part of our predictions has been onthe Laserscope. And I think right now what you see is our technology in that,that we have difficult time predicting that and I think we've built that intoour guidance here in the fourth quarter.

Chris Safelni

So whenyou talk about your prostate treatment business which you have been in for awhile, essentially finding that it's going to decline 30%, I mean it's strange,because certain parts of the business it seems, I consider it to be the corebusiness. Things are progressing reasonably well and/or beating expectationsand then they are these kind of air pockets that you hit where I am not surehow to go about forecasting in the future because the misses seem bigger than Iwould otherwise expel it. Forecasting the prostate treating business despitestable ASPs is going to decline 30%. Nine months ago, would you have forecastthat?

Marty Emerson

Chris,it's Marty. No, we wouldn't, and I would tell you that I think there is twoaspects to the business that have admittedly been difficult for us to predict.One Mark talked about which is Laserscope business and I won't repeateverything he said, because I would use basically the same words he used.

The otheraspect of it is the in-office business, and there have been in my mind over thelast two years, there has been a bit of a disconnect between what physicianshave been saying they want to see in their in-office procedure technologies andin-office procedure growth, versus what the reality is in terms of the numberof procedures that are actually, that the number of procedure that are actuallycompleted in a physician's office is well off of anyone's expectations.

And weare continuing to wrestle with that as I know a lot of other industry playersare as well, and so I would come back and say on the Laserscope side it's a newbusiness that we are learning, and on the office side there is a disconnectbetween what physicians are saying they want to see happen in their office andwhat they are actually doing in the office.

And sotherefore to take some of the risks out of that, we've been as is reflected inour fourth quarter guidance really taking down some expectation, so that we cantake the opportunity to better learn the dynamics of both aspects of thatcomment I just made.

Chris Safelni

Okay,thank you.

Operator

And Mr.Emerson, there are no further question at this time

Marty Emerson

Thankyou, Lamont. Thank you for all of you who areparticipated on the call today. And I also want thank in advance those of youwho take the time to listen in later this evening. Thank you.

Operator

And thisconcludes today's AMS Q3 earnings conference call. You may now disconnect.

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Source: American Medical Systems Holdings Q3 2007 Earnings Call Transcript

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