Hologic Earnings Call Nuggets: Guidance Outlook and 2D Falloff Rate

Hologic (NASDAQ:HOLX) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Guidance Outlook

David Lewis – Morgan Stanley: Rob, I appreciate your comment on the macro environment and I think everyone knows it’s challenging. But I think one of the stated objectives for management the last couple of quarters has been guidance was conservative and obviously wasn’t as conservative as you hope. So, I guess to the first question. Can you just explain, what’s your approach the guidance to the remainder of the year and how do you convinced shareholders that this guidance frankly is achievable?

Robert A. Cascella – President and CEO: Sure, and I think it’s a fair question David. First of all I think we have a strong confidence in our earnings numbers. I think we’ve done a good job at maintaining cost and expenses, and we are seeing the cost synergies from the Gen-Probe acquisition materializing at a faster rate. More importantly from a revenue perspective, the things that we commented on in both my script and Glenn’s did on the Breast Health side, we have an increase in backlog, which we believe relates to additional bookings and also obviously revenue for the second half of the year. And the other side of what we talked about on our Diagnostics businesses. We have a large number of competitive takeaways. We have market penetration in new areas within the Diagnostics market or contributing to what we define as our second half revenue. Now, keep in mind, our second half has always been stronger. We average somewhere between 3% to 5% higher in the second half than the first half in this analyses and in this guidance, we are averaging around 3% and for fiscal ’13 and we’re basing that on the strength of what we just saw with our bookings rate and backlog in Breast Health as well as the competitive takeaways that have not yet made their way to revenue on the Diagnostics side.

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David Lewis – Morgan Stanley: And maybe a follow-up on guidance as well. Your fourth quarter revenue guidance, implied revenue guidance, it looks like it’s in line with your historical cyclicality which you basically just mentioned. The EPS number though for the fourth quarter does look stronger than we would normally expect. Am I reading that right and are there any reasons why the fourth quarter earnings number would be materially stronger than the third?

Glenn P. Muir – EVP, Finance and Administration and CFO: It’s a little bit of some of the things that we’ve talked about earlier. When we look at our – the ability to leverage costs and expenses, it is completely driven by the fact that not all of our cost base is fixed or variable I should say, and as a result of that as revenues increase, not only do we get favorable impact in manufacturing, but we also are able to leverage the fixed operating expenses. So that our profitability, our operating margin changes by percentage points as a result of that. And that’s just math, 90% of our operating expenses are fixed and don’t move with revenue. So as we generate higher levels of revenue it changes the metric relative to our operating returns.

2D Falloff Rate

Richard Newitter – Leerink Swann: Just maybe, Rob, can you – last quarter I think you had some of the same dynamics playing out in the Breast Health division and you kind of saw a strong backlog of 3D and the trends in 2D, but you left your guidance unchanged. Now you’ve made some assumptions clearly about what kind of acceleration in or impact from the deferral of 2D. One, can you quantify what that is for the back half, what kind of year-over-year decline do you think you’ll see in 2D? And then two, what gives you confidence that it won’t necessarily be worse than what you are anticipating right now since it was a little bit worse than what you are anticipated as of last quarter?

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Robert A. Cascella – President and CEO: Yeah, I think very fair question. As we indicated earlier looks as if the 2D fall-off rate is about 20%. We are not expecting that to be dramatically different for the balance of the year. I don’t see it improving and in fact we are trying to manage it from an erosion perspective. What we’re doing defensively, quite frankly, in order to shore that number up is to really look at the low-end of the market with a lot of the used Selenias that we now have in entree from our 3D Dimension sales and going after the low-end markets in different parts of the world as well as the low-end market that it has not yet converted here in the states. Again as we look at the change in mammography, I think from a positive perspective we’re seeing great code activity, we’re seeing a lot of interest in 3D, but it is causing the 2D replacement market to stall and what we’re doing now is trying to mitigate further erosion with some of the measures that I just talked about and they are very, very tactical.

Richard Newitter – Leerink Swann: Got it. And just a quick follow-up. I may have missed it, but did you provide where you stood with respect to your original initial adopter 500 to 700?

Robert A. Cascella – President and CEO: We said we were very pleased that we made the range that we had given for the first two years after FDA approval and more importantly, that we were also confident in more than doubling of the installed base for fiscal ’13.

Richard Newitter – Leerink Swann: Off at what level?

Robert A. Cascella – President and CEO: Off of the level that we ended fiscal ’12 at. So if you did the math as to where we said we were at which was 60% of the range for fiscal ’12, we said that we would more than double the aggregate installed base of tomo units in the United States in ’13.

A Closer Look: Hologic Earnings Cheat Sheet>>

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