Aspira Women's Health Inc (AWH) 2003 Q3 法說會逐字稿

Welcome to the Ciphergen Biosystems third-quarter 2003 earnings results teleconference. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to Susan Carruthers.

Thank you. Good morning, ladies and gentlemen. With me today are William Rich, President and CEO; Matt Hogan, CFO; Dan Caserza, our Corporate Controller; Martin Verhoef, Senior Vice President of Sales and Marketing and Operations, and others who may participate in the Q&A.

Copies of the press release were distributed yesterday and are available on our Website. I would like to remind everyone that this call is for information purposes only. This call is being recorded and is copyrighted, and therefore, please note that it cannot be recorded, transcribed or rebroadcast without Ciphergen's permission. Your participation implies consent to our regarding this call. If you do not agree with these terms, please drop off the line.

Our discussion today contains some forward-looking statements, including Ciphergen's expectation of future strategic plans and operational results. Various risks may cause Ciphergen's actual results to differ materially from these expectations. For a list and description of some of these risks and uncertainties, please see the report filed by Ciphergen with the Securities and Exchange Commission.

The information in this conference call related to projections or other forward-looking statements may be relied upon subject to the previous Safe Harbor statement as of the date of this call and may continue to be used while they call is maintained on our Website.

I would like now to introduce you to Matt Hogan, our CFO.

I am going to begin with a discussion of our financials for the third quarter, and I will then turn the call over to Bill for a review of other corporate highlights. Ciphergen reported revenue of 16.1 million, a 57 percent increase over the same quarter of 2002. For the first nine months of 2003, revenue was 43.2 million, a 68 percent increase over the first nine months of 2002. Our trailing 12 months revenue were 56.8 million.

We feel that 57 percent revenue growth in what turned out to be a soft overall market for proteomics research tools is solid performance. Sales to pharma customers came back strongly for us in the third quarter, and sales in Asia remain very solid. While we recorded more NIH orders in Q3 than in Q2, our sales to NIH associated accounts were still several units below historic levels and our expectations going into the quarter. Given that capital spending on proteomic R&D tools remains generally soft as reflected in our recent trends, we feel it is prudent to revise Q4 guidance to approximately 19 million. Assuming this occurs, our revenue for the year will be approximately 62 million, which represents 58 percent revenue growth over 2002.

Looking ahead to 2004, we are confident that the that purchase and climate for proteomic research tools will improve and that our recent in plan market promotion programs, new product introductions, as well as new business development will continue to fuel growth of approximately 45 to 55 percent in 2004. We will refine that guidance with further detail in February when we announce 2003 results and have the opportunity to complete our formal budgeting process.

Our confidence in 2004 revenue growth is based on several factors that Bill will describe in some detail. First, we believe that the investment environment for proteomic tools will inevitably improve from its current state. In addition, however, we firmly believe that our newly introduced and future products will have a major impact. Our SIN chips in concert with our protein chip interface to the tandem mass back should really assist core labs to be even more productive in their main task of protein ID. Also, our new IDM platform by opening up the protein interaction market should give us a strong boost next year.

We expect our automation efforts to bear fruit, both from upgrading our existing customer base and in driving additional chip sales. In addition, we expect to advance several of our Biomarker discovery efforts into actual diagnostic assays, which is not only its own new source of growth but should be a major catalyst for system growth in the clinical and research proteomics market, as researchers see solely based Biomarker discovery being translated into both solely based research and commercial diagnostic assays.

During the quarter, we recorded revenue from the sale of 41 ProteinChip systems bringing our installed base over 460. Over the last two quarters, one-quarter to one-third of our new units are being sold with some level of automation and/or advanced software, and we have a major campaign underway with our dedicated customer success group focusing on the roughly 375 historic customers who have no and limited automation. The goal is to upgrade their throughput and discovery capabilities, which will generate both near-term revenue as well as a result in increased chip sales down the road.

Instrument sales, which we are including upgrades and accessories in, generated 51 percent of total revenue in the third quarter with 8.1 million in sales compared to 5.9 million in Q3 of 2002, a 38 percent increase. Total consumable revenue, which consists of both (inaudible) chip array sales and chromatic graphic sorbents, was 5.9 million in Q3 or 36 percent of total revenue. Of this, 2 million represented array revenue, which is an increase of 65 percent in the third quarter compared to the third quarter of last year. We think there is plenty of room for an acceleration of chip usage as automation becomes more widespread and as customers mature from discovery studies in their routine assay use.

The majority of our consumables revenue is generated through sales of BioSepra sorbents. Our BioSepra process division continues to perform extremely well generating 3.9 million in sorbents revenue, which is 113 percent growth over the third quarter last year. This operation is benefiting from the growth of a few very high-value sorbents and an increase in leads and prospects arising from our large salesforce actively promoting and cross-selling these products. The remainder of our revenue was related to service activities. For the quarter, total service revenue grew to 2.1 million as compared to 1.3 million in the third quarter last year. Collaborative service projects accounted for about 661,000 of the total in the third quarter, with the remainder coming from providing maintenance services to our customers and paid training activities. Our gross profit for the third quarter was 10.3 million, which represents 54 percent growth over the third quarter last year. Our gross margin was 64 percent in the third quarter or 66 percent if you exclude the impact of our litigation settlement reached last quarter.

Sales and marketing expense, excluding deferred comp, was 5.9 million in the third quarter of 2003 versus 4.6 million in the third quarter of last year. This increase was driven by the growth of our sales and marketing organization and promotional activities. Although if you compare this figure to the sequential period last quarter, sales and marketing expense actually declined by 2 percent. Deferred compensation and sales and marketing was 58,000 in the third quarter.

Research and development expense, excluding deferred comp and SRS milestone, was 5.4 million in the third quarter of 2003 as compared to 5.9 million in the third quarter of 2002. R&D expense was down about 23 percent in the third quarter this year versus the second quarter.

The decline in R&D spending was consistent with our expectations. We had some large R&D expenses in prior periods associated with new product launches, and this reflects a more normal run-rate. Deferred comp attributable to R&D was 46,000 in the third quarter. General and administrative expense, excluding deferred comp, was 3.1 million in the third quarter versus 3.6 million in the third quarter last year and 4 million in the second quarter of this year as our legal expenses associated with the litigation went away and we were diligent in restraining the growth in our other G&A expenses despite the growth and scale of our operations. Deferred comp attributable to G&A was 202,000 in the third quarter.

As we have been guiding, our operating losses declined quite dramatically in the quarter. The operating loss of 4.6 million was 44 percent lower than in the third quarter last year. This decline in operating loss was a function of continued revenue growth with a solid gross margin and essentially flat total operating expenses. We are now booking an income tax provision as our BioSepra operation is rapidly using up its French NOL such that we will wind up paying taxes there this year. This impacted our net loss by 526,000 6000 in the quarter.

We reported a net loss for the third quarter of 5.2 million. This compares very favorably to 7.9 million in the third quarter last year and 8.3 million in the second quarter of 2003 if you exclude the onetime charge we had for a litigation settlement in the second quarter. This is the first quarter since we went public in 2000 that we could report such sharply reduced net losses, which is a result of our strong revenue growth, high gross margins and moderating operating expense growth. We are now on a path toward breakeven and profitability.

During the quarter, we completed a $30 million 4.5 percent convertible note offering. The notes are convertible at 919 per share and represent about 3.3 million underlying shares. At quarter-end, we had 49.3 million in cash and marketable securities. This financing replenished our cash resources and gives us considerable flexibility to engage in partnering discussions with other parties for a position of strength to invest in our business without having to pull punches and to look at potential acquisitions that might fit with our strategies.

Now I would like to turn the call over to Bill Rich for more comments.

Thanks, Matt, and good morning everybody. During my section of the call, I will begin by briefly describing our continuing progress in establishing Ciphergen as a leading provider of tools and collaborative services to the proteomics market and the leader in Biomarker discovering. I want to comment on our view of market conditions in the proteomics marketplace. I will then describe our strategic initiatives to build on our technical achievements in proteomics and Biomarker discovery and will close with expectations going forward.

We made considerable progress during the third quarter on several fronts, including broadening our customer base, developing and launching innovative products, wrapping up another notch in our sales and marketing promotional programs, and applying our technology to discovery and validation of Biomarkers that in the near future as multi-marker panels will play an important role in the diagnostics industry. However, the proteomics marketplace seems to be changing in a number of ways that is affecting our business.

Several companies are reporting slower sales of mass spectrometers in the proteomics market. Proteomic MS product sales to pharma are increasing again, while academic sales are less robust. Ciphergen is seeing the same response. The expected increase in sales to pharma is materializing as we forecasted, while sales to academic and government institutions have not returned to the growth we had expected this quarter. Looking forward, we are optimistic that capital spending both in pharma and in academic and government will return and increase as the economy strengthens in the coming months. We are confident that the trend toward the need to do more in better protein research is in our favor, so an increase in spending in this sector is inevitable, and the question is how quickly we get there.

Now turning to the subject of strategic initiatives in the area of marketing. For the last several years, Ciphergen has been doing innovative and pioneering proteomics work. We are recently surpassed 200 scientific publications with our sellthrough technology, and it's important to recognize that the papers we and our customers are generating focus on significant scientific results and breakthroughs in clinical and biological and answers to clinical and biological questions.

Through our 100 person plus worldwide field scientists Biomarker discoveries center personnel and program manager network, we have developed a deep understanding of the various subsegments of scientists working with proteins, which has lead us to define the market very carefully in terms of Research Proteomics, Clinical Proteomics and Process Proteomics. Our R&D group has been developing specific applications and products tailored toward each of these markets and sets of users. This market definition and development phase has lead us to the development of our unique and powerful Biomarker discovery initiative focusing on disease associated protein Biomarkers. At this point, we are generally recognized as the clear leader in developing this emerging field, and academic, pharmaceutical and diagnostic communities are now widely focused on Biomarkers.

Having focused on market definition and development through this worldwide network, we produced with our customers over 200 scientific publications and developed enabling new (inaudible) products, which together have established Ciphergen as the leader in Biomarker discovery. We are now evolving to our next phase, which is focused on aggressive expansion of our marketing programs and increasing our penetration of the key proteomics market.

Here is how we are going to do it. In Q3, Ciphergen initiated our first-ever worldwide 14 city seminar tour in North America and Europe, which is also being extended to Japan in the fourth quarter and selected major cities and institutions. Thus far, over 1000 individuals have attended these half-day seminars, of which about 25 percent were current customers of Ciphergen learning about new applications and 75 percent were new prospects. Seminar series included detailed presentations in case studies by customers on the use of the ProteinChip Biomarker system for clinical and basic research applications. Successes in a number of diseases were presented along with specific methodologies for applying our technologies to rapid protein expression and purification, ID interaction and assay development. This was a very successful tour, and we are aggressively pursuing the leads they came from it. We will repeat this in six months with another major campaign, along with a major media campaign which will begin in Q1 next year. These expanded marketing efforts are expected to increase sales and market penetration, as well as introduce the Ciphergen advantage to increased numbers of academic and government institutions, as well as pharmaceutical and diagnostic companies.

Next, let's look at the new products in more detail that will be presented in our ongoing seminar series. Ciphergen's Interaction Discovery Mapping platform enables rapid protein interaction studies and complements our proven Expression Difference Mapping capability for Biomarker discovery while providing significant improvement in functional proteomics applications. During the quarter, Ciphergen introduced several new software tools in combination with the Ciphergen AutoLoader, customized Biomek 2000 robotic workstation, Ciphergen now offers its customer a fully automated system for protein Biomarker discovery, validation and assay on a single platform with new software for plan server-based database management and multi-marker pattern recognition analysis to expedite the development of the Biomarker diagnostic assays.

Next, let's look at strategic initiatives and progress towards potential diagnostics. In the October 14 issue of the proceedings of the National Academy of Sciences, a group at UCLA lead by Dr. Robin Farias-Eisner, published results for the study in which they used the ProteinChip technology from Ciphergen to discover three panels of multiple Biomarkers for the detection of ovarian cancer using serum from a discovery set of 184 samples. This represents potential early detection for diagnostic tests for ovarian cancer and validates the work done by the Johns Hopkins Ciphergen Biomarker Discovery Center.

In an independent effort which Ciphergen is conducting a collaboration with Johns Hopkins, Ciphergen has commenced a large validation study in ovarian cancer using over 1000 samples obtained from multiple sites around the world. The study is a follow-on to an earlier multisite study employing over 500 samples in which Ciphergen identified a multi-marker panel that may have utility of the detection of ovarian cancer. This study is the next step in our plans to commercialize this test as early as next year with a clinical diagnostic partner.

Next, Ciphergen is renewing its Biomarker discovery and development collaboration with Johns Hopkins for a fourth year. During the upcoming year, Ciphergen and a team at John Hopkins led by Dr. Dan Chan will focus on studies in ovarian, breast, prostate and pancreatic cancers. The collaboration has already produced encouraging results and descriptions of the discovery of diagnostic and multi-marker panels for prostate cancer and pancreatic cancer had been accepted for publication in leading scientific journals. A multi-marker panel for breast cancer that was previously published is currently undergoing a 500 patient multicenter validation. The goal of the program in the coming years is to advance several of these programs through prototype and final assay development and then into clinical trials as a prerequisite to commercialization.

Also, during the quarter, scientists at Ciphergen's Copenhagen Biomarker Discovery Center in collaboration with a team led by Dr. Kaj Blennow at Sovereign (ph) University Hospital completed a diagnostic Biomarker study of Alzheimer's disease. This study will be presented in November at the Society of Neuroscience's 33rd annual meeting in New Orleans.

In this discovery study, a four Biomarker panel obtained from cerebral spinal fluid samples correctly grew 29 out of 30 AD samples and 33 out of 35 age-matched normals. Further studies analyzing over 200 additional samples are underway to validate these markers for their utility in diagnosing early stage Alzheimer's disease as well as to differentiate AD from other dementias using the Ciphergen platform.

Unfortunately we don't have time to discuss our progress in process proteomics which has been significant, but you can clearly see why we're enthusiastic about the continued rapid growth of Ciphergen and our potential to expand into new diagnosing business opportunities in the near future. We wish to convey to our investors and customers our enthusiasm and confidence in Ciphergen's business future.

Now I will finish up with a description of what you can expect going forward. First, continuing rapid revenue growth driven by aggressive expansion of our marketing programs, new product introductions and new business development. Second, a clear trend toward profitability and continued high gross margins in the 65 to 70 percent range. Three, driving clinical proteomics with continued growth in Biomarker discovery center revenues, discovery efforts and clinical validation studies. There should be an increasing news flow via publication of predicted diagnostic studies' results and further collaboration with diagnostic and pharmaceutical companies. Expanding our business through emerging Process Proteomics services and product revenues. Increasing penetration of the research proteomics market with important new protein interaction applications of the technology in drug discovery and functional proteomics. And, of course, we will continue to bolster our organizational capabilities by drawing upon the expertise of industry experts.

To this end, Judy Bruner, Senior Vice President and Chief Financial Officer of palmOne, recently joined Ciphergen's Board of Directors. Judy's extensive experience in successfully managing technology companies through rapid growth phases brings important and relevant prospectives to our Board. I think I will stop there and take questions. Operator?

(OPERATOR INSTRUCTIONS). Tim Wang, Thomas Weisel Partners.

I have a question on (inaudible). At this point, many different researchers have looked at ovarian cancer markers. Do they always find the same group of proteins and Biomarkers for ovarian cancer diagnostics?

I will quickly respond to that. There was a very important result in our eyes with respect to the study done at UCLA and the study done (inaudible) was that the markers (inaudible). In general, when we are looking for panels with different sets of samples and different clinical questions, we don't expect based on our experience that the panels will completely overlap. And, in fact, it is desirable that they don't because if you are going to address a different medical situation, one definitely assumes that there is probably going to be some variation at the center of proteins relative to that.

That certainly has been a lot of other work done on ovarian samples by other groups and often with other technologies. That work has tended on focus on later stage samples where in our view the treatment questions are much less exciting from a medical utility point of view. So I think the important point to really note both in the work at John Hopkins and the UCLA study is to focus on early questions, that is to really get at detecting the ovarian tumors when they are treatable and to really get at differentiation of cancer versus other conditions. That is really where we expect Ciphergen to perform well based on these results and to really deliver very high medical utility and (technical difficulty) revenue potential.

There is one other issue I would like to bring out. You will see lots -- I think you are going to see Biomarkers coming out all over the place like tributes here in the next couple of years. The real differentiation is going to be multisite studies. You can find that if you can take a number of Biomarkers and you actually do small sample sizes, a few hundred patients, you can get very very misleading and very exciting results. It is only when you finally go to multisite around the world, thousands of samples that you can see whether or not your test is truly robust and to the level that it can be devised Ciphergen is taking that road.

I am going to be very -- make sure customers and investors (technical difficulty). We are making sure that in very large studies, multisite studies, that the markers sets we have chosen are robust enough for commercialization.

And the deal -- a follow-up question. Could you comment or give us some interim results from the (inaudible) central study you have done, and should we expect new products into the clinical labs next year?

I don't think we are ready at this point in time to comment on the initial results we had on the 500 samples, except to say that they are very substantially better than the only tests out that now for ovarian cancer, which it is a C125 test, and we have definitely exceeded the predictiveness of that test quite significantly.

It is our -- on your second question -- it is our intention upon completing a rather larger set of studies, we are in discussions with a number of people to commercialize this test. It is our hope that as early as next year we will have a commercial partner then pending successful results of this larger multisite study.

Rod Wong, SG Cowen.

Good morning guys. It is Phil Nadeau and Rod Wong. Thanks for taking my question. The first question is your business currently, I was wondering if you could give us some idea what percent of your business now is from clinical proteomics versus what percent is from more basic science drive research?

In the systems business, because that is why that is a relevant number, it is about 60 to 70 percent from the clinical proteomic side of the business.

Great. What percent do you think of the growth going forward is going to come from clinical proteomics?

I think it's actually going to be across all three segments that we will see growth, and since the base of clinical proteomics is somewhat bigger right now compared to research proteomics across proteomics in numbers, that is going to be a big bigger. But we also expect quite significant growth in the Process Proteomics area, too, and we have seen that now with the sorbents, and we are starting to see that with systems sales too, and I am very optimistic that is actually going to accelerate in the near future.

Okay. My next question is on more of the overall business environment. You mentioned that you thought the academic and government business was going to increase next year over where it is this year. I was wondering if there is something this year that you can point to specifically that has led to that business maybe falling a little short? As an extension of that, if there is anything you see developing, anything specifically that you see developing next year that should make that business more strong?

I think there is actually something happening in the anti-proteomics market that actually drives -- maybe it is some of the slowness we have seen this year in the academic market -- and it has to do with the fact that all over the world in academic circles you will see what we call core facilities, these core proteomic facilities, that have actually been a very safe haven for the mass spectrometry companies to sell mass spectrometry systems.

Their major aim actually was to go into the proteomic and identify as many proteins as possible. What we are seeing now is a tremendous shift in those core facilities. They are actually now moving away gradually from just identifying proteins -- that is what they have done in the past -- and moving to our camp where the game is all about finding Biomarkers that are actually significant to classify phenotypes, diseases and other things there.

What we have seen there is that these core samples that originally would go out to the constituency and say like, (inaudible) tools for identification purposes, were not in competition with us at all. What we are seeing right now is they are going back and telling these people that they are now samples of expertise in Biomarker discovery, and that actually has a bit of a delay, in fact, I feel on sales. Yet what we are also seeing now is that these core facilities are now coming to us and asking our advance in Biomarker discovery, which I think will really result into more sales for us, and this could actually accelerate our sales in academia in my view.

Sean McKenna, Merriman Curhan Ford.

I wonder if you could comment a little bit on why array sales were sort of down in the quarter? Is it pricing? I was kind of expecting a ramp based on the launch of IDM. Could you talk about how those two things might be related?

I think it's too early for a launch of IDM to impact chip sales. I think on this quarter over third quarter last year chip sales were still up 65 percent, which is greater than the growth in the installed base. So they are inching up.

I think what we need to do is give it a little bit more time for more of this automation to be in place out there among our customer base. People are not spending that much money to automate their systems to not use it to a greater extent. So I think it is just a matter of time before we see the chip sales ramping at an even faster pace frankly.

Okay. Great. And then secondly, could you talk about the progress on the sorbents business in terms of what you expect for growth? I know you touched on it in the call in general, but is this where you are expecting most of the growth in products to come from?

Martin and I both will answer that. Let me start out by saying that, that is probably one of the interesting bright spots in proteomics. A lot of the Amersham biotech reported very good growth in their sorbents business and in their chromatography business. We have the same thing coming out of Waters (ph). So really in the proteomics market, the protein chromatography part of the market seems to be right now more robust and growing than perhaps any other sector in the proteomics.

So we believe that as we are doing some things that Martin will talk about in a moment to really began to expand around our sorbents business by moving into not only the process market, but also moving downstream into the research proteomics market with our sorbents business.

Martin, maybe you can comment on that?

That is a very valid point there. The two things that we actually do see is with the majority or the biggest driver right now on the sorbents sales are the monoclonal antibodies that are in the different phases of development right now, and there are well over hundreds of those in development and they drive the sales of a very specific product where we have a very key differentiating position, that is our MAP sorbent, which is developed for multiple antibody purification. That is one thing that really helps us feed this growth.

Another thing that is happening now is if you look at the sorbent market, you can grossly divide it into two segments that are each around $250 to $300 million in size right now. And we actually participate in only one of those segments in the large-scale chromatography segment, and we are really seeing very nice growth there, and as I told you, one reason for that is this MAP sorbent.

We have actually now started to talk with a number of people in companies out there to find inroads in this other part of the market, which is the used part of 300,000 biologists out there of the same sorbents, but for research for pure research purposes, that market is as big as the large-scale chromatography market, and we hope to make some significant progress in the next three to six months to really enter that market, and that would really be added growth to what we are planning to do anyway.

That is fantastic. Finally, one thing. Could you guys speculate as to when you might have -- I may have missed this earlier, so I apologize -- when you might have trial results ready from the ovarian cancer diagnostic diagnostic Biomarker?

I think we will have some results in the second quarter from that. How fast we will be in a position to release that will depend on the course of paper submissions and submission and approval by journals. It is hard to forecast process. But I think we will be in a position where we know what we have got by the second quarter.

Will you be ready to submit that data, or will it just be basically just completed at that point?

Completed.

Edward Tenthoff, Piper.

Just one quick question following up on the actual instrument placement. What was the split between basic and automated systems? Also, what portion of that 8 or so million was upgrade dollars?

I would have to look up precisely the upgrade dollars, but about a quarter of the sales in the quarter were either automated and/or with more advanced software packages. So about a one-quarter of the new placements were higher end kind of systems.

And in terms of how much of the 8.1 million, frankly I would have to look it up. We have had good traction because we set up a specific group to go back to all the old customers and try to pitch, why don't you upgrade? Let us put an AutoLoader in; let us get you outfitted with CiphergenExpress Biomarker pattern software, robots. So that is a major contributor to the growth if you just take that instrument number of 8.1 million and divide by the 41 systems, that is running about 200,000 now. And a big contributor is going back to the old customer base.

Okay. Good stuff.

(OPERATOR INSTRUCTIONS). Paul Knight, Thomas Weisel.

Excuse me if this has already been asked, but I was curious. I have been hearing biotech markets are getting a little better, and what are you seeing right now?

Well, what we are seeing basically, and then again I am reading the same things you are, we are seeing by looking at the companies reporting that they are seeing some softness in capital equipment in the proteomics market. But in the consumable side of that market, it seems to be a little more robust. We're seeing (inaudible) and other people. I mentioned already Waters and Amersham Biotech, which is the proteins part of the Amersham. And the consumables side seems to be doing actually pretty well. We have not seen the capital equipment come back in the government funded academic market yet, just like they have not so far.

We have seen the return as they have, too, in the pharma industry. We're very pleased to see capital equipment sales returning to pharma at a level that we had expected, and we think that will continue in the future. So we are seeing the same things that some of the other companies are reporting.

Can you compare yourselves to Bruker in terms of either technology features and even also price?

In what? You mean particularly in the clinical proteomics area?

Yes.

The big difference between us is really the SELDI versus MALDI technology, really the major differences. And I would say from our point of view the other big differences 100 Phds distributed around the world doing customer support directly. I think those are the two huge differences.

The pricing on the technology is pretty comparable for comparable type of systems. We have a joint effort with ABI to have our interface sold with the QStar (ph), which is approximately I would say a $400,000 kind of sale. There are equivalent types of products at the set price range from Bruker. We have our single MAS systems. The pricing there is very comparable as well. The real difference is not pricing; I think the real difference is in the performance of SELDI versus MALDI and our ability to understand the market and support it.

There are no further persons in queue at this point.

Thank you all for participating, and if people have additional questions, I would be happy to try and help you. Thank you very much.

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