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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 Weisel Partners

Lenny Shimunov - Aristos Capital

Jonathan Block - SunTrust Robinson Humphrey

Bruce Jackson - RBC Capital Markets

Jayson Bedford - Raymond James

Tom Gunderson - Piper Jaffray

Tycho Peterson - JP Morgan

Gregory Weirick - Westcap Investors

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 to welcome everyone to the AMS Q3 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions) Thank you, Mr. Emerson. You may begin your conference.

Marty Emerson

Good afternoon. This is Marty Emerson, President and CEO of American Medical Systems. Welcome to the third quarter 2007 conference call for American Medical Systems. With me in the room this afternoon are Mark Heggestad, our Chief Financial Officer; and Ross Longhini, our Chief Operating Officer. Before continuing, I must preface all comments with the Safe Harbor statements.

Some of the statements made today will be forward-looking and are made under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. Those risks and uncertainties are referenced in today's press release and described in our most recent Form 10-K and other more recent filings we have made with the Securities and Exchange Commission. With that statement we can move forward with the news covered in our press release, issued earlier today.

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

Second, Ross will provide you an update on our new product activity, highlighting our robust pipeline, reviewing our clinical studies, and summarizing the physician responses to our newer technologies. Ross will also specifically address the decisions we have recently made with regards to the Ovion clinical study.

And third, Mark will provide you an update to our total company guidance for the fourth quarter and full year 2007. After the call, we will take your questions. But first, I will ask Mark to briefly review our financial performance and then I will elaborate on several key components of our business. Mark?

Mark Heggestad

Thank you, Marty. As we reported earlier 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. Comparisons between years are impacted by the Laserscope acquisition, which occurred on July 20, 2006, and therefore the third quarter of 2006 contained only two months of Laserscope revenue. The third quarter of 2007 included $26.0 million of Laserscope revenue, and the third quarter of 2006 included $18.5 million Laserscope revenue.

Excluding these Laserscope revenues, 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 third quarter comparison to the prior year's same period includes $1.1 million of favorable foreign exchange rate fluctuations.

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

A reconciliation of 2006 GAAP earnings to adjusted results is included and attached to the financial table in our press release in order to provide a basis of comparability. To provide a more meaningful understanding of our third quarter operations, the prior year third quarter earnings information shared in the remainder of this call will be as adjusted, i.e., excluding the impact of the IPRD charge related to Laserscope acquisition and certain tax items.

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

Laserscope gross margins are significantly lower then the AMS core business margins, excluding Laserscope operations result in gross margins for the core business of 84.7% and 83.9% in the third quarters of 2007 and 2006, respectively. The 2007 third quarter laser therapy gross margin of 54.8% continues to fall short of expectation, primarily due to ongoing warranty related issues, yet continues to show a gradual improvement each quarter.

Total operating expenses for the third quarter of 2007 were $66.8 million. Third quarter selling and marketing expense was $42.3 million, and as a percent of sales was 38.8% compared to 34.8% in the same quarter last year.

The 2007 selling and marketing expense margin continues to be much higher than anticipated due to lower than expected revenue combined with significant investments made in the selling organization since the Laserscope acquisition.

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

G&A spending in the third quarter of 2007 was $10.1 million, representing 9.3% of revenue and a decline in absolute dollars from the previous quarter. Total third quarter intangible amortization expense of $4.5 million was right in line with expectation and consistent with previous guidance of approximately $18.5 million for the full year.

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

The company ended the third quarter with $24.3 million in cash and short-term investment. Capital expenditures in the first nine months of the year were $13.9 million. The two largest capital expenditures relate to the ERP system, which was implemented during 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 2007 capital spending at approximately $15 million.

The company paid $20.8 million of debt 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 the fourth quarter, thereby ending 2007 at the top or slightly above the original range.

As many of you have recognized recently, the difference between our actual results and certain of our credit agreement financial debt covenants has decreased over the past several quarters. We did pass all of our debt covenants in the third quarter, but recognizing the continued pressure, we will experience that the financial performance of recent quarters impact the future covenant calculations. We felt that it was in the company's best interest to obtain amended covenant thresholds for future quarters on three of our financial covenants. They are the total leverage ratio, the interest coverage ratio, and the fixed charge coverage ratio.

The newly amended covenant thresholds 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 $15 million in 2007, we also obtained an increase to our 2007 capital spending covenants of $16.5 million. I will now turn the call back to Marty.

Marty Emerson

Thank you, Mark. Our third quarter revenue performance for the company was reflective of solid customer demand across most of the company and was also reflective of how the sales leadership changes we have put in place through the second and third quarter are already paying dividends. The strong customer demand we experienced in most of the business through the third quarter is also evident through the first month of the fourth quarter.

Our erectile restoration business reported near record revenues, slightly above our expectations, as well as a sequential increase in its growth rate. The revenue performance of this business is reflective of the strong customer response for our new 700 MS products, our market development programs, as well as the positive physician and patient reaction to our new LGX product, our enhanced cylinders for penile implants. For 2007, we expect that this business will continue to grow 12% to 16% annually.

Our male incontinence business, likewise, reported near record revenues in the third quarter, also above our expectations. As well as reporting sequentially stronger quarterly growth rates, our AUS business recorded very strong year-over-year growth as well as near record revenues in the third quarter reflecting in part the positive physician response to our new InhibiZone treated AUS. Our male incontinence business in the quarter was again significantly enhanced by the very strong performance of our new AdVance product. We anticipate that our male incontinence business will grow in the high teens for the full year 2007.

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

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

The decisions and the investments, we made early this year about our laser therapy business outside the United States, mainly the investments we have made in our international sales channels and the changes to our sales and marketing leadership, paid tremendous dividends in the third quarter as our international laser therapy business generated record revenues in the quarter, as well as reporting sequentially stronger growth rates.

Our laser therapy business in the United States was the source of the largest disappointment in our third quarter performance. Our direct sales team performed well in the quarter, generating the same level of revenues in the third quarter as they had in the second quarter, despite the normal seasonal decline our business typically experiences from the second quarter to the third quarter. This performance was in line with our expectation and also consistent with the significant penetration opportunity remaining for our GreenLight technology.

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

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

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

Physician response to our new MiniArc product was very encouraging this quarter and we are excited by its long-term revenue and gross margin prospects. As well, we believe that recently published data has established the clinical superiority of our Monarc product. This clinical data has been positively received by physicians. As such, we are increasing our guidance expectations for this business and expect that it will generate mid to high-single digit growth rate for all of 2007.

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

Finally, our uterine health business recorded reasonable year-over-year growth rates in the quarter and within our expectation. Our investment in additional salespeople very early in 2007 to support this business is paying dividend, but our growth rates are slowing. We now anticipate that this business will generate approximately $8 million of incremental revenue from 2006.

I will now elaborate further on the specific aspects of the third quarter performance of our P&L. Our core business reported strong gross margins in the quarter of 84.7%. As Mark, previously mentioned our laser therapy business generated 54.8% gross margin. As previously mentioned in our second quarter conference call, we are very pleased with the significant improvements in HPS console manufacturability and reliability. While the current cost of these consoles are still above our initial projection, we again saw sequential improvements in the manufacturing cost for these consoles and in our total laser therapy gross margin in the third quarter.

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

Our operating income was $17.8 million in the third quarter, short of our expectation and following the shortfall on our revenues for the quarter. While our operating performance was not at the level we wanted to see in the third quarter, we anticipate that our operating margins will show improvement in the fourth quarter, positioning us for a full year of quarterly operating margin improvement throughout 2008. This will be accomplished through continued improvement in our laser therapy gross margin and aggressively managing our operating expense base. While we are committed to maintaining our investment rates and R&D spending, we will look to hold our overall operating expense growth to single-digits in 2008, as we strive to return our business towards its historical profitability level.

At this point, I will now turn the 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 are introducing several new products throughout 2007, and additionally we have several exciting new products in our pipeline. As I did in our second quarter conference call, today I have planned to only give a brief update on our few key projects.

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

Next our AdVance Male Sling continues to be very positively received. There have been well over 2,000 cases performed today. We are comfortably on our way to training more than 1,000 physicians this year. Encouragingly the AUS also had a very strong quarter bolstered by the launch of the InhibiZone treat at AUS.

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

The Continuum radical prostatectomy anastomosis product is nearing the end of its feasibility study and is scheduled to enter the next stage of clinical trials later this year or early next year. A controlled release outside the United States to support post-approval procedural data collection is still on track for later this year or early next year as well.

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

At the recent AUGS meeting, the full compliment of our female stress incontinence and prolapse products were strongly represented through clinical papers and in-booth presentation, yet another endorsement of our strong commitment to innovation and patient outcome.

Our neuromuscular stimulation device [Accessa] is progressing very well and will be released in select markets outside the US in early 2008. We'll have an initial focus on treating interstitial cystitis followed 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 quick update on the Ovion clinical trial. As a reminder, the Ovion product is a minimally invasive permanent birth control device that works by including in fallopian tube. 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 anticipated outcome, and as a result, we suspended enrollment in the clinical trial this past June.

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

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

We continue to be very excited about the products we have in our pipeline. As we have mentioned on other calls, several of these products have the potential to generate over $100 million of revenue annually once they become more mature. We also have a fantastic stable of near-tem projects that will continue to keep the portfolio fresh. Marty?

Marty Emerson

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

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

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

Mark Heggestad

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

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

Marty Emerson

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

Question-and-Answer Session

Operator

(Operator Instructions). Your first 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 technical difficulties here, I apologize guys. Couple of quick ones here. Marty, I guess you made some comments about the success of the sales and marketing structure in both US and Europe, more specifically in Europe. Even though revenue is little lower than we are looking for this quarter, sales and marketing was significantly higher. Could you identify on an absolutely basis where more of that spending came from? Was it just a real re-staffing up in Europe or was it US or other items?

Marty Emerson

Maybe you are talking about absolute dollars from Q2 to Q3.

David Lewis - Morgan Stanley

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

Marty Emerson

It was more US than international. It was not tied to Laserscope, it was -- and then there was no real significant one-line item initiatives, David. So, I mean, nothing real specifically in terms of a change from Q2 to Q3.

David Lewis - Morgan Stanley

Okay.

Marty Emerson

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

David Lewis - Morgan Stanley

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

Marty Emerson

Yeah. It goes to the work we've been doing to really understand the size of prostates more or so than anything else, David. The data we've been collecting from our mobile provider partners would suggest that the vast, vast, vast majority of their procedure are focused on 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 about 50% of the market in terms of the opportunity, in terms of the total number of interventions that are delivered. And I think that goes to also -- really starting again from a procedure perspective, from a clinical perspective highlighting the differences between the historical or legacy PV technology versus the strength of the HPS technology that we think we will begin to start to realize.

David Lewis - Morgan Stanley

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

Marty Emerson

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

But given as well our continued confidence that our end-gain penetration goals, we think are very reasonable and consistent with the clinical benefits of the product, we are talking about maybe a lower slope, but over a longer amount of years.

David Lewis - Morgan Stanley

And then maybe just two more quick ones, I'll jump back in queue. The first is the countries that outperformed in Europe on Laserscope, are those countries you've mentioned similarly in the past couple of quarters over those new markets? That was number one.

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

Marty Emerson

So the international growth really was very well balanced in terms of what came out of Europe, what came outside of Europe and as well equally balanced within our direct markets, the markets where we've had a direct presence versus the markets where we are reestablishing a direct presence. So, it was actually very well balanced, nicely balanced across the globe and very clearly we're very, very pleased with that.

In terms of the male incontinence number, Ross do you have off the top your head, how that went? I mean the growth rates were higher obviously because of AdVance and the AUS. But, AUS business nonetheless was again was again a consistently strong performer.

Mark Heggestad

No, in fact the AUS business was far exceeded our expectations and is one of the highest growth quarters we've had 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 the line of Robert Faulkner.

Robert Faulkner - Thomas Weisel Partners

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

Marty Emerson

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

Robert Faulkner - Thomas Weisel Partners

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

Marty Emerson

Okay got it. No, I am very confident in that. We've always had, going back to the days of Laserscope, a really tight relationship across a handful of physician-owned providers and business-owned providers. And with the time that we've spent with them over the years or the time we've spend with them over the last four, five weeks still feel very confident that we know and understand fully their commitment to the business and their commitment at the Laserscope technology. I mean, as such aren't overly concerned about any risk of them going to competitive technologies.

As to the second part of your question, it's been really interesting as we dug into really understanding physician's use of laser technology and how that also impact the mobile provider business. I think for a long, long time and there is actually been some survey work done that reinforces this for a long time, I think there was the view that laser therapy was a wonderful technology for prostate that were upwards 40 grams, 50 grams in size and it was always presumed naturally that anything above that was a gram size that would be more appropriate for a traditional turf And so, as we've gone out and worked with more physicians and work with academic centers on our own, as well as working with mobile providers, it's become obvious to us that we are also in a position of nicely reminding everyone that HPS technology allows for a much different clinical approach for patients who have prostates that size wise are well in excess of 50 grams. And it's just an education and awareness and a market development effort, more than it is I think anything else, Rob.

Robert Faulkner - Thomas Weisel Partners

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

Marty Emerson

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

Robert Faulkner - Thomas Weisel Partners

Okay. And maybe you could elaborate on sales leadership and kind of what made them nervous specifically? Obviously, when you bought the business you talked about de-emphasizing mobile providers in the context of the business and as a whole. Were there other things 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 a long, long time and I mean measuring years…

Robert Faulkner - Thomas Weisel Partners

Yeah.

Marty Emerson

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

Robert Faulkner - Thomas Weisel Partners

Okay. Would you care to elaborate on the management changes throughout the organization, sounds like they were considerable?

Marty Emerson

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

Robert Faulkner - Thomas Weisel Partners

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

Marty Emerson

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

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

Robert Faulkner - Thomas Weisel Partners

Okay, thanks. Thanks.

Operator

Your next question comes from the line of Lenny Shimunov.

Lenny Shimunov - Aristos Capital

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

Marty Emerson

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

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

Lenny Shimunov - Aristos Capital

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

Marty Emerson

No, we do think about it that way.

Lenny Shimunov - Aristos Capital

So…

Marty Emerson

I would rather not get into details. There were aspects of both.

Lenny Shimunov - Aristos Capital

Okay. All right. Thanks.

Operator

Your next question comes from the line of Jonathan Block.

Jonathan Block - SunTrust Robinson Humphrey

Hey guys. Just first question, I was actually about to ask you question on the ASP fiber, I realized your comments about the mix. But, maybe just sort of two-fold. One, could you provide some directional color, if you would, on how it shakes out US versus international, because just looking at the AK, I mean there's a pretty big step down sequentially.

Marty Emerson

Yeah. The other thing that's in there Jonathan, is that we had significantly higher one fiber guarantee impact in 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 a significant effect, as well as I said earlier just the significant ASP difference between our distributor markets outside United States and our US market.

Jonathan Block - SunTrust Robinson Humphrey

Okay. But, can you provide us where the 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 in the $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 is that something that we're likely to start seeing in the first half of next year?

Ross Longhini

John, this is Ross. We're going to see that in the first half of next year, there are number of changes that we are making to on the design of the fiber and how we are manufacturing that. And those changes, it's not one change that's going to impact reliability, it's several changes that we are making. Those changes, some of them have been cutting already, some of them will be cutting yet this quarter, some of them will cutting through the first quarter and some of them are planned for the second quarter. So, when we'll see a significant change, we believe when we start leading all of the inventory out and replacing with these new fibers throughout 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 you implemented some changes, the occlusion rates improved, but are still below plan. So, where do we go from here? I think you mentioned some more changes and then do we take another look or because we are going down the road of I guess additional procedural changes, do you need to restart the trial and go through the IRB etcetera.

Ross Longhini

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

Jonathan Block - SunTrust Robinson Humphrey

Okay, great. Thanks guys.

Operator

Your next question comes from line of Bruce Jackson.

Bruce Jackson - RBC Capital Markets

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

Ross Longhini

The thing that we're talking about, I mean the changes that we are contemplating right now are rather minor changes 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 any changes whatsoever the FDA can say you must restart the trial, any change. And so, consequently that maybe a possibility, but we're still looking at basically the same design that we have had before, maybe some minor shape changes.

Bruce Jackson - RBC Capital Markets

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

Marty Emerson

Bruce not that we are aware of, and I know I point to how we did in with our direct sales force calling on hospital directly in the quarter. I mean, obviously, there is seasonality in our business, I mean that's given. And you can see that everything trended down slightly for us. But, we did quite well with our fiber sales inside United States, calling on hospitals, and anticipated with the momentum behind the HPS technology and the penetration push that we were on, that we would have seen similar type of results through our partner's business.

Bruce Jackson - RBC Capital Markets

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

Marty Emerson

No.

Bruce Jackson - RBC Capital Markets

Okay. And then with the US versus the international pricing, you recorded the distributor pricing, what's the blended international 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 the line of Jayson Bedford.

Jayson Bedford - Raymond James

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

Marty Emerson

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

Jayson Bedford - Raymond James

Okay. And then I wasn't fully clear on, in terms of the one fiber guarantee, why did that have such a big impact 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 way it works through our calculation. We count that fiber as it goes out of the door as a unit, but obviously it goes out at zero cost. So, it brings down the ASP dramatically.

Quite honestly, I think as much as anything we're getting better and better exposure to our one fiber guarantee in 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 out of that ERP system.

So, quite honestly it may not be so much that it's necessarily deteriorated as we're just getting better exposure to the total number of units that are going out the door underneath this program.

Jayson Bedford - Raymond James

Okay. I guess just looking to the fourth 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 in Laserscope 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 big step-up from the September quarter, and then the offset is your base business seems to slow into the high-single digit. So, if you could just speak to both of those issues in terms of the fourth quarter revenue guidance?

Mark Heggestad

Yeah. I mean, Jayson you are probably right, the core business we have between the 10% to 15% range in the laser therapy also in that range, but slightly higher. I mean, there's a lot of ways to talk at this as it's difficult when you are looking at it from a year-over-year role in really understanding what was in our fourth quarter base revenue last year. And so, the growth rate is actually down. The growth rates that were suggested in the guidance are actually down significantly from what we'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 to understand 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 Laserscope revenue at the low-end seems to be, obviously, the highest revenue quarter of the year. I am just wondering what's fueling that?

Mark Heggestad

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

Jayson Bedford - Raymond James

Okay. And just lastly two questions 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 increased competition into the office?

Marty Emerson

It's all of those things, I think, Jayson. We have been, right, we've been talking about this one for a couple of quarters now, where certainly there is a lot more interest from our competitors being in the office and physicians know that, so they are spending more time looking at different technologies. But, we've also been encouraged by the work we've been doing from utilization perspective and our ability to move the needle a little there. So, the characteristic of our Her Option business in many 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 of gynecologist who don't necessarily do a lot of surgery and it hasn't changed dramatically in that respect.

Jayson Bedford - Raymond James

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

Ross Longhini

Jayson, probably both again. I mean there is certainly more competition out there, but that's just sustained our growth in market like this. I actually think that the bigger reason for our reduction there is -- we're in the plateaued phase that we talked about before where people are waiting for the longer term data. The people that would rely on the rather short-term data that's out there in the marketplace are the ones that are using it, those physicians are already onboard. And then there is still 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 until there is four, five year data out there and we're right in the middle of that data collection period itself. I think it will reaccelerate growth once more data is available to be out.

Jayson Bedford - Raymond James

And Ross, when do you expect the new data?

Ross Longhini

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

Jayson Bedford - Raymond James

Okay. Thanks. I will get back in queue.

Operator

Your next question comes from the line 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 very good working relationship with our administrator and creditors. They were extremely supportive as we went through this process, and basically we've had a one-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 at this time, but obviously it's not material enough that we're talking about it.

Tom Gunderson - Piper Jaffray

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

Mark Heggestad

Yeah.

Tom Gunderson - Piper Jaffray

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

Mark Heggestad

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

Tom Gunderson - Piper Jaffray

Well, given that you ran out in Q1, and were running off of chunk inventory in Q2, and Q3 was weak, it's hard to believe that there is a whole lot of change in inventories in you US customers at least?

Mark Heggestad

You're talking about customers in the quarter Tom?

Tom Gunderson - Piper Jaffray

Yeah, yeah.

Mark Heggestad

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

Tom Gunderson - Piper Jaffray

Okay. And speaking of surprise, just tell us once again you're at full inventories, no supply problems across the board?

Mark Heggestad

That is correct.

Tom Gunderson - Piper Jaffray

And then, let's see, on US versus international on laser you gave in the 8-K, you're not going to say on US, in the US on lasers mobile versus direct other than approaching 50-50 by the end of the year, is that right, Marty?

Marty Emerson

Yeah. That's still our target Tom.

Tom Gunderson - Piper Jaffray

Okay. And then just kind of outside the box, kind of, question, but Intuitive Surgical has been talking recently about their success and ramping up on a prolapse procedure with da Vinci robot. Have you been seen any competition out there with some of your gynecologists trying a new method for prolapse repair?

Ross Longhini

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

Tom Gunderson - Piper Jaffray

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

Ross Longhini

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

Tom Gunderson - Piper Jaffray

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

Ross Longhini

It's not new information. It may be new in that. We haven't had a lot of information here to pour on, what size prostates were being treated. The indications are that they are treating more and 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 to do with what size prostate they are treating. They are going to be treating more and more other larger prostate as we go forward, but the opportunity is still is very significant to treat more of the prostate instead of going TURP for the larger one.

Tom Gunderson - Piper Jaffray

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

Operator

Your next question comes from the line of Tycho Peterson.

Tycho Peterson - JP Morgan

Hi, thanks for taking my call. Looking at the numbers quickly if we take guidance right after the fourth quarter and I think you already about the Laserscope ramping. Is something here that the [close] is going to slow a little bit, I'm just trying to reconcile that with the mid products slow and the ramp of that 700 MS and AdVance and MiniArc.

Mark Heggestad

Yes, sure. Pardon me.

Tycho Peterson - JP Morgan

Sorry, go ahead.

Mark Heggestad

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

Tycho Peterson - JP Morgan

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

Mark Heggestad

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

Tycho Peterson - JP Morgan

Okay. And then I guess just in terms of the overall market, I mean it sounds like you're saying 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, I couldn't, I don't know.

Tycho Peterson - JP Morgan

Okay.

Marty Emerson

It's obviously very big, but I don't know.

Tycho Peterson - JP Morgan

Okay, that's it. Thank you.

Operator

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

Gregory Weirick - Westcap Investors

Yeah, hi. I guess my question really revolves around overall company execution that really sense the Laserscope acquisition execution has been kind of spotty at best. 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 executing and what you're doing about making it a better company, that can get back to kind 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 first quarter if you remember from the supply chain perspective, we've put a lot of pictures in place, some of which shows up in the balance sheet as increased inventory, some of it goes to things we've done internally around taking a very, very, very aggressive approach to our demand planning and kind of better understand other variances in that. And then as well some of it's related to people in terms of bolstering our leadership team with more people and we talked about that on the call. And it feels comfortable that we've put that one to bed.

If you look at sales execution, again as I referenced on the call, we've actually put quite a few changes in place going back a long time, and have dramatically increased the investment in leadership up by the United States and that is certainly manifested itself in a really strong quarter, very strong across the business not just Laserscope. Very strong second quarter, strong third quarter.

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

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

Gregory Weirick - Westcap Investors

Okay.

Operator

Your next question 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 seemed abnormally high as well. I wondered if there are any connections between console ASPs and fiber ASPs may be with respect to the level of purchase commitment when you buy a console, anything along those lines that would skew either of those numbers?

Marty Emerson

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

Greg Simpson - Stifel Nicolaus

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

Marty Emerson

Greg, we want to stay away from market specific ASPs only because that's a big competitive issue that we'd rather not share obviously. But I'll leave it simply without trying not to appear to be absolute here, that we had a much higher impact just in terms of actual units of the one fiber guarantee in the third quarter than we 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 specific numbers. If you take out the one fiber issue, was there any trend in the US fiber ASP in the third quarter versus the last couple of quarters, any significant difference?

Marty Emerson

Yeah sure in the US, if were to net out the one fiber guarantee, we'd be right back in kind 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 is there an issue in the third quarter, is that continued inventory build or just something else that work here.

Mark Heggestad

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

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

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

Greg Simpson - Stifel Nicolaus

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

So, I guess my question is, are you guys under the circumstances given kind of the series of disappointments this year. Are you guys discounting essentially every conceivable disappointment that could occur and just kind of throwing everything out here. I am not asking if you are low bowling that's under the circumstances obviously, that's not the right way to put it. But is that approach you guys, probably obviously should have take earlier, but is that where we are finally at.

Mark Heggestad

Greg I don't know, maybe let me answer it a different way. The way I would look at it is, 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 as we've ever had.

Number one, we've had some volatility in Laserscope internationally over the first half of the year, now we had some volatility in Laserscope in the US. In the third quarter, we did have a very strong fourth quarter last year, we're anniversarying 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 to predict this exactly. And given those unknowns, where we had to make estimates or make a prediction, at least we try to make sure, we avoid it assuming the best in every case, that's for sure.

Greg Simpson - Stifel Nicolaus

Alright. Thanks guys, that's it.

Operator

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

Chris Safelni

Good afternoon. Mark, I am still struggling a little bit. While I can appreciate that you are launching improvements of certain new products and the challenges you've had in the Laserscope integration and launches and supply chain issues. I'm still 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 history of the company, I can't figure out whether it's the fact that the way in which you do your internal forecasting is going through an evolution, and that combined with a new ERP system generates these kinds of fits and starts where certain projection seem to be right on the money or maybe the results exceed your expectation in another parts of the business, suddenly you find that there is some sort of surprise.

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

Mark Heggestad

Okay. So couple of parts to that, I think first of all you're right. There is no doubt about it, as we go through this processes there's two things that are certainly helping 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 I think probably part of what I would say is wrong in your conclusion is, despite the fact that we now have four months under our belt with the new ERP system, we have a long way to go.

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

And if you 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 the most experienced, and the most difficult part of our predictions has been on the 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 into our guidance here in the fourth quarter.

Chris Safelni

So when you talk about your prostate treatment business which you have been in for a while, 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 core business. Things are progressing reasonably well and/or beating expectations and then they are these kind of air pockets that you hit where I am not sure how to go about forecasting in the future because the misses seem bigger than I would otherwise expel it. Forecasting the prostate treating business despite stable ASPs is going to decline 30%. Nine months ago, would you have forecast that?

Marty Emerson

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

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

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

And so therefore to take some of the risks out of that, we've been as is reflected in our fourth quarter guidance really taking down some expectation, so that we can take the opportunity to better learn the dynamics of both aspects of that comment I just made.

Chris Safelni

Okay, thank you.

Operator

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

Marty Emerson

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

Operator

And this concludes 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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