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Hologic F4Q07 (Qtr End 9/29/07) Earnings Call Transcript

November 06, 2007 | about stocks: HOLX

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Hologic, Inc. (HOLX)

F4Q07 Earnings Call

November 6, 2007 9:00 am ET

Executives

Jack Cumming - CEO

Pat Sullivan - Chairman

Jay Stein - Co-Founder and CTO

Rob Cascella - President and COO

Glenn Muir - EVP and CFO

Analysts

Amit Hazan - CIBC World Markets

Glenn Novarro - Banc of America

Tycho Peterson - JP Morgan

Ed Shenkan - Needham & Company

Mark Richter - Jefferies

Amit Bhalla - Citi

Isaac Ro - Leerink Swann

Jayson Bedford - Raymond James

Thomas Kahn - Kahn Brothers

Bruce Jackson - RBC Capital Markets

Junaid Husain - Soleil Securities

Andy Schopick - Nutmeg Securities

Presentation

Operator

Welcome to Hologic Incorporated Q4 Fiscal Year 2007 Earnings Results Conference Call. Today's conference is being recorded.

Before we begin, management of Hologic Inc. has asked the following statement be read. Certain statements made by management of Hologic Inc. during the course of this conference, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause actual results, performance or achievement of Hologic to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements.

Such factors include among others, those details from time-to-time in the company's filings with Security and Exchange Commission. We expressly disclaim any obligation, or undertaking, to release publicly any updates or revisions to any forward-looking statements, to reflect any change in our expectations, or any changes in events, conditions or circumstances, on which any such statements is based.

At this time, for opening remarks and introductions, I would like to turn the call over to the CEO, Mr. Jack Cumming. Please go ahead sir.

Jack Cumming

Well thank you Sharon, and good morning, everybody. Thank you for attending our fourth quarter and fiscal 2007 year-end conference call.

Joining me on the call this morning is Pat Sullivan, our Chairman; Jay Stein, our Co-Founder and Chief Technology Officer; Rob Cascella, our President and COO; and Glenn Muir, our Executive VP and CFO. And before proceeding I need to remind you of the Safe Harbor statement accompanying our press release applies to comments made during the call.

We are very pleased to share with you our fourth quarter and our fiscal year-end financial results for the period ended September 29, 2007. I'm going to briefly touch on the highlights, while Glenn will provide further details on our operational progress, as well as guidance for fiscal 2008, and we're then going to open up the call for questions.

Prior to discussing our quarterly performance, I would like to bring everyone up to date on our merger with Cytyc. On October 22nd, we completed our merger with Cytyc, thus creating a global leader in women's healthcare.

The product portfolios of Hologic and Cytyc provide some of the most advanced technologies in the world, to address the healthcare needs of women. By combining our companies, we are able to leverage the strength of each business, with respect to complimentary, best in class products, channels of distribution and infrastructure development.

And I would like to take just a moment to welcome, all the Cytyc associates worldwide to our family. Over the past few weeks I have had the pleasure to personally meet with many team members in Marlboro. In addition I have attended customer meetings in Scotland with our northern European team, traveled to Costa Rica and visit with our enthusiastic team in San Jose, and traveled to Hong Kong to meet with our Managing Director for the Far East.

Cytyc has a team of passionate professionals, and together with Hologic's team, we will reach our shared goal of improving women healthcare, worldwide through better detection, improved diagnosis, less invasive treatment and therapies, and overall better outcomes.

With that, now let me review our performance. I am very pleased to say this marks our 15th consecutive quarter of increased revenue and earnings. All of the Hologic team members did an outstanding job in the fourth quarter and, as a result of their efforts, we were once again able to record revenues, earnings, and backlog.

Let me take a few minutes to summarize our financial results. As stated in our press release, fourth quarter fiscal 2007 revenues totaled $202.6 million, which represents a 31% increase over the fourth quarter of fiscal 2006. Fourth quarter fiscal '07 net income totaled $32.1 million, compared with a net loss of $1.5 million in the fourth quarter of fiscal '06.

Fourth quarter '06 results though, included a write-off of in-process R&D in connection with Suros and R2 acquisition. As an additional comparison for you, our non-GAAP adjusted net income for the fourth quarter of fiscal '07 increased 132%, to $35.9 million, compared to our non-GAAP adjusted net income of $15.5 million in the fourth quarter of fiscal '06.

For the 12 months ending September 29th, '07, revenues increased 60%, to $738.4 million compared to revenues of $462.7 million for the 12-month period in fiscal '06. And for the 12 months ended September 29th, '07, Hologic recognized net income of $94.6 million or $1.72 per diluted share, compared with net income of $27.4 million or $0.56 per diluted share for the comparable 12-month period in fiscal '06.

Q4 revenue and earnings exceeded our previous record high for the third quarter of fiscal '07. Mammography and Breast Care revenues increased 45% to $165.1 million for the fourth quarter of fiscal '07, compared to $114.2 million for same period in '06.

Selenia full-field digital mammography system sales continue to set quarterly records. As you may recall from our last quarterly conference call, we forecasted 340 Selenias for the fiscal fourth quarter. Once again we surpassed our target, by recognizing 351 Selenia systems, as revenue in Q4 up from the 193 systems we recognized as revenue for Q4 2006, an increase of 82%.

For all of fiscal '07, we recognized 1,189 Selenia systems as revenue, which represents 114% increase, over the 555 systems sold in '06. Fourth quarter Selenia bookings were solid pushing backlog to 589 systems, which is 30% higher than 455 systems we had in backlog at the end of fiscal '06.

Also contributing to quarterly growth was an increase in orders for Hologic's computer aided detection system for digital mammography, and our Suros line breast biopsy systems and devices. Total backlog for all products at quarters end was $241 million, which represents a 24% increase over the $194.7 million backlogs ending Q4 of '06.

In summary, whether acquisitions of R2, Suros, AEG, BioLucent, and most recently Cytyc, we have built a company that is larger, stronger and better positioned to serve the healthcare needs of women.

We are a company with a unified culture, and a shared passion for innovation and growth. Throughout fiscal '07, we have kept the promises we have made to our customers, our investors, and our dedicated team of Hologic associates worldwide, that make us the company we are today. With our established track record we expect further progress and success.

And now, I have the pleasure of asking Pat, who I believe has a streak of participating in over 40 consecutive conference calls, for his comments and perspective, on moving forward together as one company. Pat?

Pat Sullivan

Thank you, Jack. These are truly exciting times for the combined companies of Cytyc and Hologic. As Jack mentioned the combination of these two companies, creates one of the leading companies in the world with a broad array of products focused on women's health.

Over the past several months, I have also had the opportunity to meet with many of Hologic's people in the field. I attended a Hologic scientific advisory board meeting, as well as the meeting of their leading distributors in Europe. In both instances I was completely impressed with the people I met, and the dedication they displayed.

I am convinced that this merger is a good fit, for both companies, as we start to integrate the businesses and the people together, to realize the future potential of Hologic. From my perspective we are off to a very strong start. The day after the merger closed, we held the first meeting of the new Hologic Board of Directors, and hit the ground running.

I was truly impressed at how well the members of the two boards came together, to work as a very effective board. As noted in the press release, the ongoing patent litigation between Cytyc that we had with TriPath Imaging was settled.

Since the terms of the settlement are confidential between the two companies, I am not at liberty to comment further, other than to say that we are very pleased that this litigation is behind us.

Over the next several months, I will be spending a fair bit of time with Glenn, meeting with investors at upcoming conferences, as well as attending the RSNA in Chicago, and hope to see some of you there.

And finally, as we close this chapter in this part of the Cytyc story, I would like to personally thank those Cytyc executives and board members who are not moving forward, for their significant contributions to Cytyc's success in the past. And to thank those that are moving forward for their continued dedication to women's health, under the Hologic banner.

With that I would like to turn the call over to Glenn for the update on the financial performance. Glenn?

Glenn Muir

Thank you, Pat. Let me now expand on the financial results. My comments are also summarized in a Power Point presentation, accessible on the IR page of our corporate website at [hologic].com. My presentation today includes certain non-GAAP financial measures and a reconciliation of these non-GAAP financial measures to their most [directly] comparable GAAP [enterprises] set forth in the same power point presentation at hologic.com.

It was another stellar quarter for Selenia, which just like last quarter accounted for one-half of our total revenues. Total revenues at $202.6 million were $11.1 million or 6% higher than the June quarter and $48.5 million or 31% higher than Q4 September of last year.

Selenia sales this quarter continued to be robust, recording revenues of $101.7 million, representing over two-thirds of our growth year-over-year. We also saw continued growth from our Suros biopsy group, which more than doubled from Q4 of last year, and our service group, which experienced a revenue increase from $23.5 million to $31 million. As we continue to capture a higher percentage of service contracts on a growing installed base of Selenia.

Regarding Selenia, the 351 systems sold this quarter was above our forecast at the beginning of the quarter, we had targeted 340. Demand continues to outpace our expectations. 287 or 82% of these were sold in the US, and 64 were sold overseas.

In addition in the US, 260 or 91% of these Selenias were shipped with Digital CAD. The Selenia ASP this quarter, as with last quarter, are stable. Last quarter I believe there was a bit of confusion around the Selenia average selling prices and a misconception that ASPs had tumbled.

Taking total Selenia revenues and dividing by the number sold, to compute an average, can result in a very misleading number. Like last quarter, it is important to realize that calculation is a terrible proxy for actual selling price trends, and can be expected to fluctuate widely. When thinking about our ASPs, it is important to note competitive factors are currently low on the list.

The primary drivers for our seemingly changing ASPs are as follows: first, the geographic mix. As we sell more internationally, our mathematically calculated ASP will go down. This is primarily due to the fact that we sell through distributors at a transfer price, who are then responsible for most of the service, sales and marketing expenses. So although gross margins may be lower, operating margins are almost the same as a direct sale.

Second: for our product mix, our Selenia line has expanded to include various hardware configuration changes that can affect the total ASP, without affecting the price for the base capture modality. This is especially true in multi-unit orders, where our customer won't need a full contingent of soft copy viewing workstations, or capture devices.

And then third: in regards to follow on sales, we are beginning to see existing digital customers place repeat orders, and they will only require the base capture modality as they already have the viewing infrastructure in place. So what does all this mean? Not much from a margin standpoint.

We are disclosing total Selenia revenue, because it does account for one half of our total, and we are disclosing the number of Selenias, because it has become a standard benchmark. So, we just need to be cautious when using these figures to try to derive an average.

Much more meaningful is to look at the individual gross margins on each sale, as we do internally. This strips away the differences in hardware configuration. And for the quarter, our gross margins in the Mammography/Breast Care segment increased to 52.3% versus 49.9% in the June '07 quarter, and 46% in the September quarter one year ago.

Our overall consolidated gross margins improved this quarter as well, hitting 48.2% or 49.5% on a non-GAAP adjusted basis, due in large part to the overall increased sales volume, and the continuing shift in mix to the higher margin Selenia digital mammography sales.

As Jack stated, our consolidated net income this quarter was $32.1 million. This increase in GAAP income handily beat our expectations as the higher level of revenues contributed $32.4 million of additional gross profit in Q4 of last year. Partially offsetting this was an increase in operating expenses, also primarily due to the increased volume.

Without the acquisition related charges, and stock compensation expenses, the non-GAAP net income would have been $35.9 million. This works out to an adjusted EPS of $0.65. If now we could look at our largest reporting segment, the mammography/breast care, and compare it on a sequential basis to our June quarter, the press release gives the comparison to the year earlier quarter.

This quarter, the revenues from our Mammography/Breast Care segment accounted for 82% of our total, up 8% from the June quarter. The increase in revenues of $11.6 million from June, was primarily due to the increase in the number of Selenias sold from 328 to 351, and an increase in Suros console sales, and biopsy hand piece volume.

The increase in operating income was due to the increased gross profit from the higher revenues, and the operating income as a percent of revenues continued to increased hitting 28.2%, up from 24.7% last quarter.

Switching to ending backlog, which at September 29th was $241 million, was considerably higher than the $193 million balance from a year ago, and slightly higher than the June balance of $22 million. As Jack stated, the backlog of Selenias rose to a new high, 589 systems, up 52 from the June quarter, and up a 134 from one year ago.

Even though we shipped 11 more Selenias than expected, our unit backlog increased again this quarter, as we took orders for 403 Selenias. This was a much better booking quarter than expected.

Two factors stood out, first: the continued interest in digital mammography in general. This market is continuing to expand, especially here in the United States, and digital has become a standard of care. And number two: Selenia is recognized as the best of breed digital product out there, and it has allowed us to achieve a 55% plus market share, here in the United States.

Also to note this quarter though, is that we benefited from the timing of a large single order for 40 systems, which is something we don't see every quarter, and probably won't see in the December quarter. In Q1 '08, the December '08 quarter, we will again increase the shipments of Selenias, with the goal of stemming this rising ending backlog.

I would now like to provide our outlook for fiscal 2008, our fiscal 2008 guidance, which ends on September 27, 2008. We have completed our operating budget for FY '08 for both Hologic and Cytyc, which includes the synergies, integration stats, and revenue targets on a combined entity basis.

On October 22, the day of the merger, we did start with a fully vetted operating plan in place. If we start with fiscal '08, we are looking for total consolidated revenues of $1.7 billion. Basically in four reporting segments, for the mammography/breast health and the skeletal health segment, we are forecasting $900 million in revenue, which represents 22% growth over fiscal 2007, and this is primarily attributable to an increase in Selenias.

We are projecting an increase of 261 Selenias from 1,189 in FY '07 to 1,450 in FY '08. In addition, we are expecting continued revenue growth from the Suros biopsy group of about $30 million dollars, and service revenue growth in excess of $30 million.

Second of all, for the other two reporting segments, the diagnostics and the surgical segments, we are forecasting $800 million in revenue, representing 13% growth over fiscal 2007, attributable to across the board growth in Cytyc's two FY '08 reporting segments.

Their diagnostics, with expected revenues of $485 million, due to imager sales: Adeza, and continued international expansion, and surgical with expected revenues of $315 million, due to: NovaSure and also continued international expansion and growing acceptance.

It's also important to note that only 49 weeks of Cytyc's projected revenues are included in our fiscal 2008 budget. We are missing the first three weeks, which resulted in about $35 million in revenues. If these three missing weeks were included, Cytyc's year-over-year growth would have been closer to 18% and our consolidated growth in fiscal 2008 for revenues would have been projected to be 20%.

Next for gross margins: We are looking for combined gross margins of approximately 61% to 62% on an adjusted non-GAAP reporting basis. This does exclude the amortization of intangibles included in costs, for which there will be approximately $105 million in FY '08. Combined operating expenses are expected to be $515 million to $520 million for the year, and are also excluding the amortization of intangibles, which are expected to be around $35 million.

Included in the above numbers though, are approximately $15 million of FAS 123R stock compensation charges. We have not backed them out of our guidance, but will indicate what they are quarterly and show them on our non-GAAP reconciliation schedule in the press release as we currently do.

For interest expense, we are forecasting interest expense on the outstanding $2.35 billion of debt, of approximately $110 million. This is $30 million higher than we were expecting on May 20th, when we announced the deal, due primarily to three factors.

First: the overall long term LIBOR rate we are using is a bit higher than it was in May. Number two: the credit spread on the term loan is 25 to 50 basis points higher, and number three: we were expecting a lower coupon equity link debenture, concurrent with the deal close. At this point, we are reviewing our options, [deal on] equity linked debenture fits in nicely with our capital structure, but have not settled on the timing.

The above combined results also reflect the results of Cytyc for only 49 weeks instead of 52 as I mentioned, due to their closing of the merger on October 22nd, and not September 30th, date we had hoped for. It does make a difference, as it reduced expected revenues by almost $35 million, and pretax income by about [Technical Difficulty] million.

For the year our effective tax rate is expected to be 36%. If we look at shares outstanding for Q1, we are expecting total shares outstanding for EPS purposes, to be approximately $110 million. This will be lower than the total outstanding, since the shares issued for Cytyc will only be outstanding 10 of the 13 weeks.

We are expecting the shares outstanding to increase to $126 million in Q2 and to $130 million by the end of the fiscal year. This should result in a weighted average, number outstanding of $125 million. This is the number outstanding we were expecting in the May time frame.

So for EPS based on all the above we are expecting non-GAAP adjusted pretax income, which excludes only the amortization of intangibles of $420 million to $425 million. And our EPS guidance for FY '08 on this adjusted basis with 125 million shares outstanding would be $2.15 to $2.20. This is absent the effect of any merger-related charges, such as in-process R&D, which will hit, and will distort Q1.

Going back to May though, on the same basis, our guidance was, at that time $2.35 to $2.40. Operationally, we are a bit ahead of where we thought we would be, looking at the combined results, and are very pleased with the synergies and targets baked into our budget.

The $0.20 disconnect is due directly to two items already identified. Number one: the higher interest expense cost us $30 million that was approximately $0.15 on an after-tax EPS basis. We do believe this drag will be short lived, as we will be very focused on the rapid repayment of our term debt, and expect a year from now the term debt itself could be one-half of its current $1.1 million balance. And number two: missing the first three weeks of Cytyc's results and the current budget cost us about $0.05 on an after tax EPS basis.

Switching to Q1, our December 2007 quarter -- our September Q4 actual results were a bit better than expected. We are expecting continued growth in revenues in Q1 of '08, on both the Hologic and Cytyc business groups of just over $5 million each. This would equate to over $10 million in sequential growth; however at the same time, we will only recognize in Cytyc's revenue this quarter ten out of the 13 weeks.

At a run rate of about $12 million a week, missing three weeks is a sizable impact on the consolidated total. So instead of combined guidance, for this upcoming quarter of $395 million to $400 million, we are looking at reported revenues of approximately $360 million.

On the Hologic side, we are continuing to see growth in Selenia sales. We are expecting to sell 361 Selenias or 10 more than last quarter. We expect that the Mammography/Breast Health segment will have the largest revenue increase this quarter.

On the Cytyc side, we expect to fold their international operation into the reporting for diagnostics and surgical. Both of these segments will then, and are expected to show sequential growth this quarter. Consolidated gross margins are expected in the 61% to 62% range.

Combined operating expenses excluding the amortization of intangibles, are expected to be in the $110 million to $115 million range. Interest expense, associated with the $2.35 billion of new debt, is expected to be approximately $30 million for the quarter, and non-GAAP adjusted pretax income would increase to $85 million. This includes stock compensation charges of $3 million. At an effective tax rate of 36% and with 110 million shares outstanding, our EPS for Q1 would be approximately $0.49. However there are a number of one-time acquisition related charges that will hit Q1, and will distort our true results.

Not included in the adjusted non-GAAP figures above will be charges for; in-process R&D of approximately $320 million, inventory write-up to fair market value of approximately $35 million, and stock compensation expense of approximately $6 million to $7 million, from the acceleration of certain Hologic stock options. These expenses will be identified when we report our Q1; it will be included on the reconciliation to GAAP in our reported numbers. And if I could turn it back to you.

Jack Cumming

Thank you, Glenn. I would like to just kind of look ahead here. While we've accomplished quite a bit in fiscal '07, we certainly have a lot more to go to accomplish in fiscal '08 but as a much larger company. Some of our goals for the upcoming year include, continue to aggressively pursue share gains for our Selenia digital mammography in both the US and in the international markets.

And for the ThinPrep Pap Test and the Imager, we want to increase adoption across a broader segment of the international markets. For NovaSure we want to drive more minimally invasive treatments procedures to the office from the OR, and for MammoSite, we want to increase awareness of partial breast radiation as a potential alternative to external beam, which is the current standard of care.

An example of one such product is our Solero device. As you'll recall, we launched the Suro Celero self-contained hand held core breast biopsy device, which is already generating significant interest in the medical community. Beginning last week, 50 MammoSite sales reps joined forces with 30 Suros breast care technology reps to jointly sell the Celero, Celero mark introducers and the biopsy kit, as well as their own individual product lines.

Each team will have two distinct sales channels with MammoSite sales reps selling to surgeon’s offices, and the Suros breast care technology reps selling to hospitals and breast imagining centers. Combined, these two groups will make a significant impact on growing the customer base held by Suros. This is a unique product placement opportunity for doctors, patients, and Hologic, and it is only one example. There's a long list of agenda items for fiscal '08.

We are looking forward to our national sales meeting in January where our talented diagnostics and GYN surgical teams will come together on driving efficiencies across the spectrum of products we market, including cross-training in products, and new initiatives such as the introduction of our bone densitometry products into the OBGYN channels. We definitely have some exciting times ahead.

In closing, Hologic enters fiscal 2008 as a technology leader in women's health. We are going to continue to invest in technology, as we deliver the very best the industry has to offer, across all product lines, while expanding upon future platforms, which will position us ahead of the competitive curve.

With all of our accomplishments in fiscal 2007, we look forward to 2008 with great excitement. I'd like to thank the 3,500 Hologic team members worldwide, for their continued hard work and dedication to make our objectives a reality. We could never achieve our goals without having a passionate and a committed team of associates and we have the best the industry has to offer. And that is why we are number one.

And on a final note: our next conference call is scheduled for Tuesday morning, November 27. It’ll be held at the Radiological Society of North America Symposium, which will be our fourth analyst day that we hold there in Chicago

If you are planning to go to the RSNA this year, we would like to invite you to our morning presentation, which will focus on new product developments and introductions this year. And if you are interested, call or e-mail us, and we will make sure that you are on the guest list.

This now concludes our opening remarks, and I would be most pleased as will Pat and Glenn, and Rob, and Jay to take you questions. So I will now turn the call back over to Sharon, and ask her to key everybody up.

Question-and-Answer Session

Operator

(Operator Instructions) We will go first to Amit Hazan, CIBC World Markets.

Amit Hazan - CIBC World Markets

Hey, good morning guys.

Jack Cumming

Good morning.

Amit Hazan - CIBC World Markets

Congratulations on the acquisition closing. I thought maybe I would start just asking: on the Cytyc side, just for a little bit more color if you can? At least on the growth of some of the product lines we have been accustomed to hearing about NovaSure and perhaps Proxima.

Jack Cumming

That's fine, Pat you want to do that?

Pat Sullivan

Yeah. I think if you look at the overall domestic surgical products, in total it was a 24% growth quarter versus the September quarter of last year, and [re-look] at nine months was about 30% growth. In total surgical, we did see a relatively seasonal quarter in the September quarter with NovaSure being slightly down from where it ended the second quarter.

Amit Hazan - CIBC World Markets

And could you answer the same question in terms of the guidance you provided?

Glenn Muir

Yes, Amit its Glenn. You mean the earlier guidance on…

Amit Hazan - CIBC World Markets

In terms of the fiscal year '08 guidance, just trying to get a sense, if you are looking at Cytyc surgical and Cytyc diagnostic, what's making up some of the growth there?

Glenn Muir

Well, when we think about, let me try to help a little bit there and it gets a little bit difficult with fiscal year '08, because the reported results are going to be hindered a bit by losing these three weeks. And…

Jack Cumming

Glenn let me interrupt for just a second. Also, when we go to the four reporting segments in it what you are going to find surgical is not an apples-to-apples, as it was before, because MammoSite is moving out of that group into our interventional breast health group, with Suros.

So it will no longer be part of surgical. So it won't be apples-to-apples, but we did have a good increase this quarter domestically in the surgical products group about 24%. Glenn, I am sorry to interrupt.

Glenn Muir

That's okay. That helps. If we look at it though, Amit, and we look at the guidance we're giving for as Jack said, the two segments that formerly were Cytyc, both the diagnostic and surgical and expect for a moment that with some of restructuring the reporting has changed, that those segments will include international in the future.

So those two segments we're looking at, to comprise $800 million of the $1.7 billion we are projecting for '08, and if we look at the diagnostics, that piece would be $485 million, and that is growth. That is 18% growth over FY '08, and is being driven by, here in the United States, imager sales, internationally by ThinPrep in general, and then both domestically and international, by the full term product itself.

So all lumped together, you are looking at the mid-teen, as a percent growth for diagnostics. And it's a similar story with the surgical though. The surgical in FY '08 is expected to be about $315 million. That's only being dominated by the NovaSure procedure itself, both here in the US, and also beginning to get traction international, as we expand outside the US and see some growing acceptance. I don't know if that helps.

Amit Hazan - CIBC World Markets

It does and I will follow up off line, but can you, just in terms of Adiana, or Gestiva: do you include either in your guidance? And what is your expectation for Adiana approval?

Jack Cumming

The Adiana approval. Well Pat, why don't you go?

Pat Sullivan

We submitted that, as I think we indicated on our last call in August of this past summer, and would expect a panel some time in mid-December, followed by an approval in the February, March time frame. So we would start to launch the product at that point of time, and I think we have relatively little in terms of guidance for the Adiana product for next year.

Gestiva, I don't think we have anything in that, we are in the middle of an animal study that we expect to wrap up an approval would be in the -- about the calendar third quarter of next year.

Jack Cumming

There are no numbers in there for Gestiva for '08 and, as Pat said, very minimal for Adiana.

Amit Hazan - CIBC World Markets

Great, and one final question, and I'll jump back in queue. Glenn in terms of the guidance you provided for EPS, versus the guidance you gave in May, just to be clear: from all the work you have done, the only two reasons that the guidance is lower, is because of the interest expense and Cytyc not contributing the full fiscal year? Is that correct?

Glenn Muir

Yes, that is correct. Those are the two differences and actually from an operational standpoint. We are quite pleased with where we ended out, or came out with a combined budget. So unfortunately the two knocks, when we look back to May were those two items.

Amit Hazan - CIBC World Markets

Okay. Thanks very much guys.

Operator

We’ll go next to Glenn Novarro, Banc Of America.

Glenn Novarro - Banc of America

Hi good morning guys. Two questions, one regarding the guidance, the lower guidance, $0.15 was due to higher interest expenses. And then Glenn, you said that you are still looking at some sort of equity-linked product. If you were to do an equity-linked product, let's say in the next several months, would that $0.15 drag be reduced and what's your best guess as to what it would be reduced by? That's question one.

And then secondly: you had a very good quarter with Selenia and the backlog. Can you giver us a sense of, was that market share gain, growth? Any color that you can give us. I think in the past you said that you pretty much are capturing 55% of all placements. Is that consistent? Thanks.

Glenn Muir

Okay Glenn, thanks. I will let Rob answer the question on Selenia, since he is out on the road making every single one of those sales and I will stick with the interest expense on the $0.15. In that $110 million, is baked in, later in the fiscal year, some kind of lower coupon rate, than what we currently have on the term.

So we have baked a little bit in; however, I will admit we are probably being a bit conservative with that number, so that it at least doesn't come in higher than that. And I would have to say, that there is probably a little bit of leverage, if we have a nice placement of some other equity linked debenture out there, and we're successful as we intend to be, in paying down the term loan, maybe even a little bit faster than we were expecting.

And I even alluded to that, in that even though we are starting with $1.1 billion of term loan, I do believe that we are in a good position that we can get that paid off in half. Some of it might be a restructuring or replacement, but nonetheless, almost in half by the end the fiscal year and that could be helpful to this $0.15. But at the moment I think we are just comfortable with that $0.15, Glenn.

Glenn Novarro - Banc of America

Okay, great.

Jack Cumming

Glenn, on the Selenia backlog, Rob is going to answer that, but I am elated to find out that he has been involved in every single sale, because now Jay and myself and Tom mumble and a lot of our folks, we are just going to kind of pack it in and for the rest of the year, sit back and run the business while he's out there.

Glenn Muir

I may have over reached a bit on that, I am sorry.

Jack Cumming

Alright.

Rob Cascella

Thank you, both. Glenn on a serious note, I will try to respond. We had a very strong quarter relative to just market interest, I think the digital mammography market continues to grow, and there is deeper penetration on many, many fronts.

I think that, linked with the fact that it was our fourth quarter, a lot of sales, compensation plans have threshold pricing and trigger amounts. That drove some business as well. The large single order, we're viewing as a, we are very happy and pleased that we've received that. But we view that outside of our trend and somewhat of an anomaly. From a market share perspective, I think our new bookings versus revenue we're probably north of 60%.

Glenn Novarro - Banc of America

60.

Rob Cascella

60, yes.

Glenn Novarro - Banc of America

Okay. So you are starting to take market share from GE. One last thing, that 40 unit placement: was that part of the original guidance in terms of Selenia orders that you gave three months ago?

Rob Cascella

No. No, that was not.

Glenn Novarro - Banc of America

Okay, alright.

Jack Cumming

We had a strong quarter without that.

Glenn Novarro - Banc of America

Okay. Great, thank you.

Operator

We will go next to Tycho Peterson, JP Morgan.

Tycho Peterson - JP Morgan

Hi, Good morning. Thanks for taking the call. Hey, Rob. Maybe following up on that last line of questioning, on the call there was some discussion about multi-system orders and repeat orders. Can you just give us a sense of: how many of your orders today are either multi-system or repeat orders with existing customers?

Rob Cascella

Sure. We are seeing a much higher percentage of multi-system orders and also customers are coming back to fully convert to digital. I would guesstimate at this point and we are probably talking about somewhere in the area of 40%. It could be a bit higher, but that may be a fourth quarter phenomenon as well Tycho, but we are seeing larger orders than originally expected, from a broader range of customers, and for the first time, we are actually seeing multi-system orders from outside the United States, which typically has not been part of the trend.

Tycho Peterson - JP Morgan

Is that predominantly Europe?

Rob Cascella

Yes.

Tycho Peterson - JP Morgan

Okay. How about, are you also seeing competitive swap outs for GE installations? You talked about seeing some of those in the past.

Rob Cascella

Sure, as you might guess, the installed base of older competitive products are now coming to term on lease, or otherwise and many of those are now, are being approached by Hologic sales folks in terms of replacing those with new Hologic equipment. We are succeeding in winning over some of those accounts.

Tycho Peterson - JP Morgan

On the topic of bundling, you have talked in the past about the pull through with maybe Suros in some of the multi-care tables. Can you give us a sense as to how often you are seeing bundling as well?

Rob Cascella

We are first of it, we sell a multi-care table, we are always quoting on [a-tech] as well, so that there is an automatic synergistic fit between the multi-care and our breast biopsy products. In addition, although there's not a direct link, there's a packaging and pricing, when we sell Selenias, and as that relates to an a-tech, or a multi-care for that matter even, our osteoporosis assessment products. I would say that at this point, that bundling equates to somewhere near 20% to 25% of our business, incorporates a Selenia with other modality type products.

Tycho Peterson - JP Morgan

It's okay. You have been pretty good in the past about breaking out Suros R2, and the AEG contribution. Is that something you can do again and maybe add BioLucent?

Jack Cumming

What do you think?

Rob Cascella

We --.

Glenn Muir

While the R2 is a little bit difficult, it's all bundled together in the $101 million of Selenia sales. For the most part, most of the R2 we sell is bundled on digital. There's still some small follow-on analog, but it really is together. It has become just a normal part of Selenia at this point. Over 90% of the US Selenias had CAD on it.

Suros has been steadily increasing every single quarter. I think this past quarter, we hit close to $18 million on the Suros. I mean the importance there is if we look out into FY '08, we are continuing to see that to increase, now that we have more of the boxes out there. And we are guiding to a $30 million increase in FY '08 over the almost $60 million that Suros contributed in FY '07. So it's nice growth in FY '08 for that whole Suros group.

Tycho Peterson - JP Morgan

Okay. And then finally, I guess if I'd be somewhat remiss if I didn't give you a chance to address the Philips news, so however you want to comment on that.

Jack Cumming

Well, this is Jack. I don't really see it as a lot of news, but I think that we have a high regard for Philips. We know them very well. They have no experience or very, very limited experience in selling mammography. They did years and years ago, and they actually sold an old Lorad private label product.

They sell, and they have access to a Siemens system in Europe on the analog side. If it's a new system, then they will have to go through the PMA process. If it is a system that they're using from someone else under a private label, they will still have to do some filings. The only ones that are approved, as you know, are Siemens, ourselves and General Electric and Fuji.

So I don't know where they're going to go for it unless it's with Siemens. If it's with anybody else, they'll have to go through the process. I think they're a great company, and I think they should stick to their knitting on 64-slice CT scanners and MRIs.

Tycho Peterson - JP Morgan

Okay. That's helpful. Thank you very much.

Operator

We'll go next Ed Shenkan, Needham & Company.

Ed Shenkan - Needham & Company

Thanks, Jack. A question on the imagers, you know, Quest is going to now start implementing. I wondered if you could tell us: how many units you’re expecting for Quest? Maybe what timeframe? And then: how many imagers we did in the quarter?

Jack Cumming

We'll I'm going to take a chapter from Pat, because I know he has said this so many times. I'm not trying to steal his thunder, but as far as the relationship with Quest goes, over time, we expect to place the imager in the majority of Quest sites. And that’s about as good as we are going to get relative to the relationship and the number et cetera. And that is based on our agreement with Quest, and it's a growing relationship and it's a solid one.

And I am very happy we can be involved in that now with Pat, but we are in deference to our client Quest. We are saying exactly what they would like us to say, and there is no reason for either one of us to kind of say any more than we are very, very, excited about the fact that in the majority of their sites, there will be an imager over the course of time.

Ed Shenkan - Needham & Company

And can you say: how many imagers were there in the quarter?

Jack Cumming

Pat, you want to talk about that one?

Pat Sullivan

Yes, we continue to ship over 30 imagers on a quarterly basis. This quarter, we did 36 for the quarter. And as I have said many times, we expect that number to continue at about 30 per quarter, but we did a little bit better this quarter than we had historically done in the past.

And as to Jack's point, we are very excited that the pilot was successfully concluded, and they're implementing this phase deployment. We are very excited about that development.

Ed Shenkan - Needham & Company

And now you won't be breaking out internationally, move forward into the other business units as you said? Where does GliaSite set? And are you still thinking about selling that business or is it sticking with the family?

Jack Cumming

GliaSite will be sold.

Ed Shenkan - Needham & Company

Okay. And until it gets sold, where do you break it out?

Jack Cumming

The number is so nominal that it is really not material at all. It's lost in the, I guess, the surgical number, Pat or --?

Pat Sullivan

Yes, it's in surgical, but it's a de minimus number, not really material to the results.

Ed Shenkan - Needham & Company

And last question, as far as headcount reductions and cost savings with the merger: can you tell us what has happened to date and what you would expect to happen in the upcoming days?

Jack Cumming

Pat, you or I could answer that.

Pat Sullivan

Yes, I would say, as I mentioned in my comments, there were a number of senior executives at Cytyc that decided to move on and do other things. Tim Adams as an example, Dan Levangie has retired and remains on the Board, and there were several others. But I think in total, Jack, there were what, 10 or 11?

Jack Cumming

11 people total. Those that decided to leave on their own and the few others, I mean those changes have been made and everybody is in place marching forward. So we do not expect to make any changes other than in the course of normal business.

Ed Shenkan - Needham & Company

Then you wouldn't expect changes then in the sales force and other areas? Coming up, should we expect: business as usual?

Jack Cumming

Absolutely. If anything, I think you would see us adding salespeople. Businesses are growing, and we are continuing to look in that area. But you are not going to certainly see change out there. Those people that were driving the change on the diagnostics and surgical business are exactly the same people in the field that are driving it today as are the district managers and the field salespeople. So we don't see change other than in the course of normal business.

Ed Shenkan - Needham & Company

Thanks, Jack.

Jack Cumming

Thank you.

Operator

We will go next to Mark Richter, Jefferies.

Mark Richter - Jefferies

Hi, guys. Good morning.

Jack Cumming

Good morning, Mark.

Mark Richter - Jefferies

Can you just break down new orders in the quarter? They were obviously strong US versus OUS?

Jack Cumming

For which product line?

Mark Richter - Jefferies

For: digital mammography systems.

Jack Cumming

Usually, it runs 80-20, but, Rob?

Rob Cascella

It looks like we, of the orders that we booked -- I am just looking at some of the information we have. I think it's…

Jack Cumming

Yes, it's about 80-20.

Rob Cascella

350 so on units were domestic, and the balance is international for the booking rate for the quarter.

Mark Richter - Jefferies

Okay. Perfect. Thank you. And during the quarter, RadNet obviously announced it will purchase over 30 full-field digital mammography systems. Based on our diligence, we learned that that was you guys and also learned that they have about 55 or so sites that could buy additional digital systems. Can you just comment on: if you have any expectations of filling those orders and sort of timing on that?

Rob Cascella

Well, at this point, we are focusing on the initial orders, and obviously we want to do the best job that we possibly can on those. And I am sure if we execute, then there will be future business that hopefully we will be rewarded with.

Mark Richter - Jefferies

Okay. Thanks. And then back to guidance, I mean last quarter, you talked about sort of with the credit markets declining, people were starting to think about it and talk about potentially this impacting you. You commented that you didn't think it would necessarily impact guidance. Clearly, it did. I mean, Glenn: can you maybe help us understand better what's changed in that timeframe?

Glenn Muir

Well, I think when we think about guidance, Mark, I think we are really talking about the effect of the interest expense. Is that what you are asking?

Mark Richter - Jefferies

Exactly.

Glenn Muir

Yes, because the $0.05 effect from Cytyc closing three weeks later than we anticipated is clearly unfortunate. We just can't get around that in purchase accounting. You don't get credit for those three weeks. So that's just the way it is.

I think when we look at the interest expense, I mean, there are some uncontrollable factors here. And as the credit markets weakened -- I mean, we appreciated we are in a very strong position with the syndicate of banks that provided a firm underwritten loan. We knew this deal was going to get done, but at the same time, we wanted to play it very efficiently.

We did, in fact, make some certain accommodations during this timeframe. And as you know, we really didn't have much control over LIBOR. So when we take all of this into account, it did have an impact. I would argue that in my mind, it isn't any kind of sizable impact, because if I am sitting here a year from now and most of that term loan is gone, we are going to be in a much different position.

So I am not troubled by that $0.15. I mean, it's very short lived in any case. And I think we just have to appreciate it for what it was in the kind of credit market environment we have.

Mark Richter - Jefferies

Okay. Thanks. That's helpful. And the last question just is: can you provide us to the extent that you're comfortable, or will any tomosynthesis updates, in terms of timing of anything, basically: any timeline updates on tomo?

Rob Cascella

Sure. The FDA submission has been completed. We are waiting for comments and obviously a review. There will be a panel review. It is not yet scheduled. Other than that, we believe that we are on track from product development perspective and are also in a position, come the first calendar quarter, we'll be installing baby units at clinical sites, so that we can gather more market data.

We will be presenting some additional clinical data at RSNA as well in terms of the findings from our reader study and the researchers that we have used thus far. That's about it.

Jack Cumming

As an add on that, the market data that Rob is talking about that we'll be doing in the January, March timeframe has nothing to do with our filing. It is additional work that we're doing, and the filing what's complete and submitted as he said. This is for other indications and uses.

Mark Richter - Jefferies

Perfect. Thanks, guys.

Jack Cumming

Thank you.

Operator

We will go next to Amit Bhalla, Citi.

Amit Bhalla - Citi

Hi. Thanks for taking the question. I just wanted to follow up there on tomosynthesis. So what's the date that you are expecting for the panel?

Rob Cascella

We don't really have a specific date yet. That is still under discussions. We would imagine that it's probably sometime in the first calendar quarter.

Amit Bhalla - Citi

Okay. And then for Glenn: can you talk to us about the synergy guidance and any updates there on the cost and revenue side for the next couple of years?

Glenn Muir

Yes. When we pulled our budgets together, we didn't really focus on the synergies as much as we focused on the growth going forward. So I really don't have a good update to give you, nor do I anticipate going forward that we will step back and look at any kind of synergies. I mean we are going to look at this going forward, but I would -- this is high-end supply a little bit with some of the cost savings we talked about earlier.

We are clearly in a growth mode. And if we look at the revenue guidance for FY '08, for the full year for Cytyc, we're looking at projected revenue of 20%. So it really is all hands on Board to get that growth here, both domestically and to expand internationally.

So the synergies are the simple synergies that you would expect by cross-selling with sales forces that we've talked about before, but I think that we don't have a dollar amount to put against it, some of the cost savings from one public company, but they're clearly not anything substantial really to go into. This is all about driving both companies' business going forward.

Amit Bhalla - Citi

Okay. That's helpful. Can you comment on the mammography operating margin? It again was very strong in the quarter. Can you talk about what your expectations are for 2008 and what kind of room you kind of left for yourself for better contribution on the bottom-line?

Rob Cascella

I think as we continue to grow that business, we have two things that work in our favor. One is that obviously we are getting better factory absorption and utilization. So we have just an implicit margin improvement from that perspective. And then secondly, our operating expenses are not all variable. So, again, as we continue to shift more, we end up having improved profitability because of the fixed versus variable aspects of operating expenses also benefited by the gross margin improvement that I mentioned just a bit ago.

Amit Bhalla - Citi

So: what should we be thinking about for the mammography operating margin for next year? And I'll just throw in: how should we think about the order run rate for the upcoming quarters?

Rob Cascella

I will answer the second one first. As we have always said, orders are not, they're not a trend in a quarterly snapshot because of things just like this last quarter. That's an extraordinary example. But there maybe others where there are larger orders from single customers that end up distorting what the trended orders might look like within a given quarter.

We're expecting order growth. We're expecting, both growth in the domestic market and also we're expecting very strong growth internationally for this upcoming year. As far as the operating margins, from an improvement perspective, I think we have commented on our gross margins from an overall business perspective.

I think where we are going to see operating margin improvement is on really just the reduction in operating expenses as a percentage of sales for the very reasons that I gave earlier in terms of that being fixed versus variable. And we assume that maybe that's 1 to 2 percentage points of an improvement relative to operating expenses as a percent of that business unit's revenue.

Amit Bhalla - Citi

Okay. So then, I just want to make sure I heard it correctly. You did about 1,320 orders this year for fiscal '08. That order number should be increasing on a full year basis?

Rob Cascella

Yes.

Amit Bhalla - Citi

Okay. All right. Thank you.

Operator

We will go next to Isaac Ro, Leerink Swann.

Isaac Ro - Leerink Swann

Good morning, everyone. Thanks for taking the question. First question, could you maybe give us an update on where you stand in terms of your space and maybe capacity in Costa Rica and what your plans are for that space over the next year?

Jack Cumming

Pat?

Pat Sullivan

Yes, we are in the process of building a new factory in Costa Rica. We've got about one of the factory right now of about 40,000 square feet. We're on a two-shift basis there in the current facility. We have broken ground. The shell is up. We expect that factory to come on line mid next year, and it triples, more than triples the footprint of the factory that gives us more capacity to meet the demand.

Isaac Ro - Leerink Swann

Okay.

Pat Sullivan

It's also for expansion purposes of other capacity that we have in place for those type of assembly products.

Isaac Ro - Leerink Swann

Okay. Thanks. And then second question would be on the osteoporosis business. It looks like the operating margin there has stabilized. What do you think the opportunity is a year from now in that business based on the current reimbursement environment?

Rob Cascella

I think we are seeing a shift. First off, let me comment that I think our international business has been quite strong. So, we see good margin and revenue, certainly not double-digit growth, but a stable to moderate growth business.

Domestically, I think we've seen the worst of it relative to a decline in revenue, and that was primarily the result of our focus on primary care, which is a market, which is much more difficult than a declining reimbursement environment to penetrate.

What we are seeing today is acute care of a hospital market resurging relative to not just more units, but at a higher ASP, because they typically are higher end product offerings. So, again, it's not going to be a double-digit growth business for '08, but we do believe that a single-digit growth in that 5% to 6% range is appropriate for that business.

Isaac Ro - Leerink Swann

Okay. Great. And then last question would just be on CAD. I know in the news lately, there has been a little concern coming out of, I think, United on reimbursement changes there. Given what happened over in Portland earlier this year, do you think it's conceivable that UNH has taken a similar kind of very limited cursory overview of that New England Journal study and really haven't kicked the tires on the benefits of the technology and that maybe there is a more in-depth policy review that's going on there?

Rob Cascella

Yes, to all of that. We think that it's a reaction to an article and a study that have known flaws. Clearly, much effort is going into convincing United that that was a decision -- they erred in their decision. Our expectation is that they will see the benefits clinically of CAD and will do the right thing for their universal patients.

Isaac Ro - Leerink Swann

Great. Thanks so much.

Rob Cascella

Sure.

Operator

We will go next to Jayson Bedford, Raymond James.

Jayson Bedford - Raymond James

Hi. Good morning. Thanks for taking the call. Just a couple of questions: First, because I know it's going to come up, just looking at the number of Selenias in the quarter, your guidance was 340. You didn't expect the 40 unit order. You did 351. You backed that out. You did 311. I am just wondering: is that more of a timing issue? And is the more important number: the number of new orders at 403 units?

Rob Cascella

Well, the units that came in, none of those were revenue for the quarter.

Jayson Bedford - Raymond James

Okay.

Rob Cascella

And that's the first thing. And then secondly, in fact, those will not materialize as revenue. All, within even this next quarter, those will be spread out over multiple quarters.

Jayson Bedford - Raymond James

Okay. So they're part of the new order number.

Rob Cascella

They're part of the new order number. Yes.

Jayson Bedford - Raymond James

Okay. Thanks. That's helpful. And then on the guidance, I think I have somewhere in my notes that combined business gross margin could be 65%. It looks like the guidance here is 61% to 62%. One: did I hear incorrectly? Or two: what has happened in the last few months?

Glenn Muir

I don't think anything has happened, Jayson. As we put the businesses together, we really focused on where we would add for FY '08 and try to structure our guidance around what we are seeing today. I think what we have to appreciate is just like in the Hologic businesses where we always talked about a target margin of getting to of 50%, that's what the 65% represents. We have a target out there that we are going to strive to hit over the next year or two, and that would be that 65% target. And it is being driven by the some of the things Rob talked about.

I mean: clearly, the mammography/breast care segment has the highest potential for improved gross margins. I think the surgical would be probably number two, led by NovaSure. So, we see a path getting up to 65%. We are not comfortable for FY '08 at being there at this point in time, but that's would be the direction we'd expect to head as the revenues continue to increase and we get more leverage out of the business.

Jayson Bedford - Raymond James

Okay. That's fair. And then lastly, just a couple of quick ones for Rob on the mammography side: Are you selling more or seeing increased interest in the Selenia S product? And then secondly: are you seeing more interest from lower volume centers out there?

Rob Cascella

There is a pick up in Selenia S, but it's still a small percentage of the number of overall Selenias that get booked. To the second question, yes, we are certainly now seeing that it's a combination, as I said, of multi-system orders with larger customers, but it's also smaller customers now that are looking at Selenia, but they're looking at it from a group buying perspective.

So, they're a member within a GPO, and they're relying on the GPO to negotiate better rates or better pricing for them. Groups like Broadlane or Novation. So although they maybe smaller players with not a lot of buying power, they're benefiting by the buying power of being a member of organization. So we are seeing a lot of tie-ins to that as well.

Jayson Bedford - Raymond James

Okay. And then just lastly, Rob, just on the tomosynthesis product: have you completed the final form factor of the product?

Rob Cascella

Yes. There are alpha units that are in a commercial format, but built under engineering control that are in the market today at two sites, two research sites. The beta units will be built under manufacturing control pre-FDA, and those will be out in the market in January. But they're a duplicate or really ostensibly the same product as our alpha just built by a different discipline within the organization, meaning manufacturing versus engineering.

Jayson Bedford - Raymond James

And the manufacturing and scale-up preparation for the beta units: is that largely complete?

Rob Cascella

We actually already have the infrastructure built in our second facility in Danbury, Connecticut. So, the alphas were built by engineering with manufacturing support. The betas will be built by manufacturing with engineering support, all within the same facility, which has already been created. It's part of the organization that we have in Connecticut.

Jayson Bedford - Raymond James

Okay. Fair enough. Thanks, guys.

Operator

We will go next to Thomas Kahn, Kahn Brothers.