Revvity Inc (RVTY) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, thank you for your patience and welcome to the first quarter 2006 PerkinElmer earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to your host for today's presentation, Mr.Steve Delahunt, Director of Investor Relations and Treasury, please proceed, sir.

Good afternoon and welcome to PerkinElmer first quarter 2006 earnings conference call. If you have not received a copy of our earnings press release, you may get one from our website at perkinelmer.com or from the First Call Network or from our toll-free investor hotline, 877-pki-nyse. Please note this call is being webcast live and will be archived on our website until May 11, 2006. Before we begin, we need to remind everyone of the Safe Harbor statements that we have outlined in our earnings press release issued earlier this afternoon and also those in our SEC filings. Any forward-looking statements made today represent our views only as of today. We disclaim any obligation to update forward-looking statements in the future even if our estimates change. So you should not rely on any of today's forward-looking statements as representing our views as of any date after today.

During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures we plan to use during this call to the most directly comparable GAAP measures is available in our earnings press release. To the extent we use non-GAAP financial measures during this call that are not reconciled to GAAP in that press release, we will provide reconciliations promptly. I am now pleased to introduce the Chairman and Chief Executive Officer of PerkinElmer, Greg Summe.

Thank you, Steve. Good afternoon, everyone. I appreciate you joining us to discuss PerkinElmer's first quarter of 2006 results. With me today is Jeff Capello, our Chief Financial Officer, and Rob Friel, our Vice Chairman and President of Life & Analytical Sciences. I will begin by reviewing the highlights of the quarter, Jeff will provide more detail on the financial results and after that, the three of us will be available for questions and then we will close the call. We made good progress this quarter. Our earnings growth was excellent, our cash flow performance was strong, we fully completed our divestiture of Fluid Science and we made good progress in business development and in new products. Our only disappointment was that our revenue growth came in slightly below our forecast. I will first review some of the financial highlights of the quarter and then speak about our growth platforms. Our GAAP earnings per share from continuing ops were $0.17, up 42% compared to $0.12 in the first quarter of 2005. Our cash EPS is $0.22, up 38% over the same period in 2005.

Our revenue was up 2% after adjusting for the net impact of foreign exchange and acquisitions and down 1% reported. While the organic revenue growth of 2% was slightly below our expectation of 3% to 5%, the year-over-year revenue comparison was challenging, as we had a strong growth in Q1 of '05. Furthermore, some timing issues on production and MPIs worked against us this quarter. We expect our growth to pick up in Q2 and remain comfortable with our full-year 2006 estimate of organic revenue growth of 5%. With our improved profitability and continued working capital progress, we're able to deliver strong operating cash flow, excluding a one-time tax payment related to the divestiture of our Fluid Sciences business. The cash flow was $20 million, up 47% from Q1 of last year. Our working capital turns were up 6/10 of a turn over last year and our continued strong cash flow allowed us to repurchase 5 million shares and reduce our overseas debt.

We continue to have a very strong balance sheet with approximately $114 million in net cash, which gives us significant capability to fund our growth investments both capital spending and product and technology acquisitions. Looking at our growth platforms, our genetics screening business continues to grow in the mid-teens and broadening our position in neonatal and prenatal screening. Public awareness continues to drive expansion in the number of disorders screened and we continue to expand the business internationally. Recently PerkinElmer won the neonatal expansion projects for both Russia and Israel. We will be the primary supplier for neonatal testing in Russia. We also continue to build our maternal health business and during the quarter we secured the exclusive rights to placental protein 13, which is a biomarker for preeclampsia. Preeclampsia, which affects both mother and fetus, is prevalent in 5% of all pregnancies.

This is part of our drive to better manage high risk pregnancies. We also developed an agreement with the Jacobi Medical Center that will focus on the development of a screening platform for neonatal, prenatal, maternal health using a innovative bead-based multiplex technologies to identify and validate biomarkers for genetic disease. We will continue to broaden our genetic screening footprint. Our OneSource service business continues to show good momentum with key business wins and an increase in multi year contracts driving double digit order growth in the first quarter of 2006. Revenue growth for the quarter was in the high single digits and was strong across all regions, especially Pac/Rim and Europe. We continue to have good visibility to additional opportunities and expect the current revenue growth rate to continue. Our medical imaging business continues to see very strong demand in both the diagnostic and therapeutic end markets. At the same time, we have been limited by capacity expansion issues in our production of flat panels.

The qualification and yield improvement of our new production tools is proceeding well and, as we said in our fourth quarter earnings call, we expect a return from low single-digit growth to double digit revenue growth in the second quarter and we're on track to do so. Our environmental business delivered mid single-digit revenue growth during the quarter. We also expect this momentum to continue based on the strength of our products, ongoing global demand for improvement in air, water and food quality, and growth in the Asia/Pacific region. The biopharma market was our biggest challenge, being down bid single-digits. We anticipate this becoming neutral for us in Q2 and then moving into positive growth as our MPIs in both instruments and reagents for cellular analysis and Proteomics gain market acceptance.

In addition, we have finalized a number of growth initiatives including our licensing agreement with LumiLux, that will focus our biomarker panels for pharmaceutical development in [ambitox]. We also acquired the mass tagging proteomics labeling technology of Agilix Corporation, which will enable customers to quantify proteins from multiple samples simultaneously. This technology will reduce the process workflow in proteomics analysis and enable more accurate studies in protein expression, kinetics and pharmaco dynamics. Further, we have established a number of alliances, including a five-year research collaboration agreement with George Mason University to develop and do an innovative approach for cancer detection and risk stratification. The alliance initially calls for the creation of a new proteomics technology to accurately measure and detect specific protein fragments found in human blood, which are potential biomarkers for disease. In the proteomics business, sensors did well with high single-digit growth. Our specialty lighting business was down due to continued drop-off in film-based photography.

While the decline in film takes time to fully replace, flash digital photography is growing rapidly. We expect digital to further accelerate its growth as the number of flash-based high-resolution cell phones ramp up in the second half. We are bullish on this market and see our way clear to crossing the technology transition gap between analog and digital. I'm now going to turn the call over to Jeff Capello, who will discuss our first quarter results in greater detail. Jeff?

Thank you, Greg. And good afternoon. This afternoon I will provide some details on our revenue, cost, and cash flow for the first quarter 2006. Then briefly discuss guidance for Q2 and full-year 2006 before I open up the call to your questions. Before I get into the specifics, I want to clarify that whenever I talk about a particular measure being up or down, I'm referring to an increase or decrease in that measure during the first quarter of 2006 compared to the first quarter of 2005. And to the extent that I use any non-GAAP measures, those have been reconciled to the comparable GAAP measure in the appendix to this presentation on our website. It's important to note that this is the first quarter where we have recognized the impact of FAS 123R, expensing of stock options in our financial statements. We have elected to apply this standard on a prospective basis beginning in the first quarter of 2006. As a result, the results of Q1 '06 and Q1 '05 are not comparable with the impact of new standard being a pretax charge of 1.7 million or $0.01 a share.

Turning first to revenue, we furnished the first quarter of 2006 with sales on a reported basis of 355 million compared to 358 million in the first quarter 2005. On an organic basis, which for the purchases of this call excludes the impact of foreign exchange and acquisitions, Q1 2006 revenue increased 2%. By segment, organic revenue growth was 2% in LES and 1% in Optoelectronics. The effects of a stronger dollar in Q1 2006 relative to Q1 2005 decreased the current quarter sales by approximately 2%. This foreign exchange impact by segment was 300 basis points in LES and 200 basis points in Optoelectronics. Geographically revenue in the Americas, which represented approximately 44% of our revenue for the quarter, was down low single-digits organically, impacted by the timing of the receipt of orders, as well as capacity issues in our aSI fab. Revenue in Europe, which represented about 37% of our revenue for the quarter, was up mid single-digits organically.

And Asian revenue representing about 20% of our revenue for the quarter also increased mid single-digits organically. Gross margins for the first quarter 2006 were [40%], a decline of roughly 150 basis points over 41.4% in the first quarter of 2005. Gross margin for LES were adversely affected by foreign exchange, with a partial offsetting benefit in SG&A. While those at [Optdort] were adversely affected by lower volumes in our aSI business caused by capacity expansion issues. Gross margin is expected to return to more normal levels in the second quarter of 2006. R&D expenses were 22.8 million in the first quarter of 2006 compared to 22.6 in the first quarter 2005. The increase in R&D after adjusting for the stronger dollar would have increased R&D in the mid single-digit range, reflecting our increase in investments in some of our [GLAC] growth platforms. We expect the rate of R&D investment to increase as we move our way through the year.

Selling, general and administrative expenses were 25.3% in the first quarter 2006, down from 27% in the first quarter of 2005. Stock option expense of 1.5 million is included in the quarter ended Q1 2006. The decline in selling, general and administrative was primarily driven by the stronger dollar, along with productivity initiatives across all entities. GAAP operating income for the first quarter 2006 was 29 million compared to 28.7 in the first quarter 2005. Excluding intangibles amortization and stock option expense, operating income in Q1 2006 was 38 million or 10.7% of sales, up 70 basis points from Q1 2005. Looking at expenses below operating income, interest income net of interest expense in Q1 2006 was 1 million, compared to interest expense of 7.4 million in Q1 2005, due to significant debt reductions over the last 12 months and continued strong cash generation. Other expense net of 1.2 million increased 500,000 compared to Q1, apparently due to the cost of hedging our foreign currency balance sheet exposures. The tax provision of 7.1 million for the first quarter of 2006 reflects a rate of approximately 24.5%, which is consistent with our full-year guidance and in line with our Q1 2005 tax rate.

We expect to be able to sustain or improve on a 24.5% tax rate during the year, depending on the distribution of actual income and other items. Net income from continuing operations was 22 million in Q1 2006, an increase of 41% from 15.6 million in Q1 2005. GAAP EPS from continuing operations grew 42% for the same period to $0.17 from $0.12 in Q1 2005. Excluding intangibles amortization and stock option expense, our EPS was $0.22 in Q1 2006, up 38% from Q1 2005, meeting First Call consensus of $0.22, in the middle of our forecasted range of $0.21 to $0.23. During Q1 2006, we closed the sale of our semicon division of our Fluid Sciences business which generated proceeds of approximately 26.5 million, with additional contingent consideration and an after-tax gain of $2 million. The optimum results of this division had been classified as discontinued operations on the income statement. Net income increased to 23.6 million in Q1 '06 from 19.8 million in Q1 '05 resulting in an increase of 20% in GAAP EPS to $0.18 from $0.15.

Turning to our segment results, I will briefly describe our Q1 performance. All the revenue growth I will discuss is on an organic basis. In LES revenue for the first quarter was 262 million, up 2% organically over the first quarter 2005. On a GAAP basis, LES operating profit for the first quarter 2006 was 23.8 million, compared to 22 million for the first quarter 2005. Excluding amortization of intangibles and stock option expense, LES Q1 2006 operating margins were 11.9%, up 110 basis points over Q1 2005. Productivity initiatives offset the impact of a stronger dollar to drive these strong operating margin expansions. In genetic screening, which was about 12% of LES's revenue in the quarter, organic revenue increased double digits, continuing strong momentum of growth. We continue to see strong organic growth in neonatal screening, which grew strong double digits driven by the expansion of our MSMS platform in the Americas.

Prenatal screening also grew strong double digits in the quarter compared to Q1 2005, driven by strong adoption of increased tests in Europe. As Greg mentioned, we continue to see strong growth opportunities in terms of expanding the number of tests in the U.S., geographic expansion, as well as the development of new tests in the areas of maternal and prenatal testing. Service, which represented about 23% of our LES revenue in Q1 '06 grew high single-digits organically, also continuing with its momentum of strong growth. We continue to see good traction in our OneSource business, as we continue to generate increased leads for this product offering. The outlook for the service business continues to be very strong as our customers increasingly see the value proposition of providing solutions to increase productivity, reduce complexity and realize cost savings. In the environmental chemical product lines, which represented about 27% of our LES revenue in the quarter, organic revenue increased mid to high single-digits.

Once again we had strong performance in our inorganic product lines, which had double digit growth in Q1 '06 compared to Q1 '05, driven by growth in our ICP and ICPMS product lines where we continue to see international demand, improved air, water and overall environmental quality and addressed bioterrorism concerns. Biopharma sales, which represented 38% of LES revenue in the quarter, was down mid single-digits organically compared to the same period 2005. The organic growth comparison year-over-year for 2006 was negatively impacted by unusually strong performance in certain product lines in the first quarter of 2005. Within biopharma certain businesses showed improvement in year-over-year revenue growth versus Q1 '05, including selected multilabel detection instruments. We are beginning to generate a return on our investment in the areas of cellular screening in both LumiLux and CellLux, all high throughput cellular imaging platforms bring traction as we sold our first units and are seeing strong interest in the field.

In Optoelectronics, revenue for the quarter was 93.5 million, up 1% organically over a very strong first quarter 2005. Double digit growth in Q1 05, coupled with low single digit growth within our aSI business in Q1 '06, created a difficult year-over-year comparison. It's important to note that the historical results of Optoelectronics for Q1 '05, as filed previously in the first quarter of '05, were decreased by approximately 3.4 million from 96.8 million to 93.5 million due to a divestiture of two small businesses. Optoelectronics GAAP operating profit in the first quarter of 2006 was 12.7 million or 13.6% of revenues. Excluding intangibles amortization and stock option expense, operating margins with 14.6%, which represents a decrease of 60 basis points compared to first quarter 2005. Capacity and investment in our aSI fab had a significant impact on our operating margins, given the fixed costs nature of the facility. As Greg mentioned earlier, we expect the fab to return to more normal operating levels in the second quarter, which should increase our operating margins.

Within Optoelectronics, imaging grew approximately mid to high single-digits organically during the quarter, driven by strong demand in analytical subsystems and nonmedical imaging products. As discussed earlier we're capacity constrained in our fad with aSI, which limited our growth in the quarter to low single-digits in medical imaging, despite very strong demand. We expect the capacity issues will be resolved in Q1 2006, at which time we expect the business to return to double-digit growth. Sensor revenue was up mid single-digits organically, driven by growth in our high performance sensor and photodiode businesses. Specialty lighting was down high single digits organically compared to Q1 of last year due to continued decline in the sale of single-use flash driven by decline in film single-use cameras only partially offsetting the increase in digital camera flash units.

Now, turning to the balance sheet and cash flow. During the first quarter of 2006, we had GAAP operating cash outflows of 35 million. This amount includes one-time tax payments of 54.6 million related to the gains recorded in 2005 on the divestiture of the Fluid Sciences businesses.

The importance of the account rules, these tax payments are classified as operating cash flows despite related cash inflows from the sale as being recorded as financing cash inflows in 2005. Adjusting for this one-time payment, operating cash flows for the first quarter 2006 was 19.8 million, up 47% from the first quarter 2005, reflecting continued strong cash flow. Our focus on working capital continues to pay dividends as we had a 0.6 turn improvement year-over-year in working capital turns, the progress being made across all components. In particular we made strong progress in accounts receivable where we drove DSOs down four days year-over-year to 72 day sales outstanding. Our continued generation of strong cash flow coupled with a solid balance sheet allowed us to make further progress on multiple initiatives. Within the quarter we increased our reinvestment, spending 9 million in capital expenditures, up from 4 million last year. In addition, we purchased an incremental 5 million shares for 116 million, bringing our total shares repurchased to 6.1 million out of our approved 10 million share repurchase program.

We finished the quarter with total cash of 322 million in net cash, which we define as total cash less short and long-term debt of 114 million. The balance sheet strength and cash flow generation continues to provide the company with tremendous flexibility, as we look to expand our growth platforms and return value to our shareholders. We expect organic growth to improve and result in roughly 3% to 5% organic growth the second quarter of 2006. Foreign exchange will continue to be a negative impact on growth by approximately 100 basis points, yielding expanded growth on reported basis of 2% to 4%. For the second quarter 2006, we are forecasting GAAP earnings per share from continuing operations of between $0.20 and $0.22 with the impact of stock option expensing expected to be $0.01. Excluding the impact of intangibles amortization and stock option expense, we are forecasting cash earnings per share from continuing operations of between $0.25 and $0.27 for the second quarter 2006. This would represent an increase of 25 to 35% over the second quarter 2005 to $0.20 per share.

For 2006, we are forecasting organic growth to be approximately 5%. These 2006 revenue growth estimates ignore any impact of foreign exchange. We continue to expect 2006 operating margin expansion of 75 to 100 basis points over 2005 levels, enabling full-year cash EPS of $1.20 to $1.25. The estimated impact of intangible amortization is forecasted to be $0.15 per share for full year 2006, while stock option expense will have an impact of $0.04 per share for the same period. Free cash flow is expected to exceed net income despite a healthy increase in capital expenditures to fuel our growth. I will now open the call to your questions.

Thank you very much. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Jason Weiss of Robert W Baird. Please proceed.

Hi, good afternoon. This is Quintin.

Hi, Quintin.

So, Greg, it sounds like that you're feeling pretty confident that the Q2 outlook is coming around. Could you, is it coming from the April orders or the outlook or for some of the MPIs later this quarter?

I would say Quintin, it's more the flow of the business year-to-date and where we've had, where we see sort of sales volumes improving. So it's everything from the Amorphous Silicon, which is a business that has very high demand placed on it and has been completely capacity constrained, and we track the yield improvements and the capacity improvements as we go through. So you think about that. Irrespective of what the result was for the first quarter, it sort of moves in a line up as you go through the quarter and therefore sequentially you can project that forward to some MPIs that we have to some different comparables over the prior years. So I think we look at the mix of businesses and then I would say, of course, also some operational initiatives in the sales force. So we look at the mix of business, what we saw in the first quarter was, as I mentioned earlier, frankly, a little bit below what we had expected. But a couple timing things sort of moved against us. And we think most of those are out of the way. And therefore, we feel pretty good about the momentum into the second quarter.

And then for the outlook for the back half of the year, by our math, it looks like you're expecting organic growth to be in excess of 5%. So, what kind of assumptions are you making for the biopharmaceutical overall market in order to get to that level?

I'm going to ask Rob to answer that. The leader of the LES business, give Rob a chance to speak to that.

Quintin, this is Rob. I think with regard to the market in biopharma, we're assuming fairly consistent market conditions. I would say minimal increasing R&D budgets overall in the industry, but of course if you look company by company, it varies fairly significantly. So, our issue in biopharma is not really a market situation, it's one of really changing technologies and changing spending habits within the biopharma industry over the, say, last couple of quarters and our ability to catch up to where the market is now.

As you know, we've talked about it in the past so it's really a situation where we go from being fairly strong in high throughput screening and the market now is focused more on high content. You have the move from biochemical to cellular assays and of course from rad reagents to nonrad. If you look at some of the new products we've got coming out in this quarter and the beginning of the third quarter, it will put us more into the, I would say, the technologies where spending is occurring. And so that's what gives us the confidence to talk about better growth in the back half as compared to the first half. So not really a market situation, really more our ability to get products out into the areas where the spending is occurring right now.

Thanks.

You're welcome.

Thank you very much, sir. Ladies and gentlemen, our next question come from the line of Paul Knight of Thomas Weisel Partners. Please proceed.

Rob or Greg, so we what, deduct 3.5 million or so from the prior year quarters due to these discontinued operations?

That's right, Paul. This is Jeff. We had two small businesses, our fiberoptics business and our lithography business. Fiberoptics we classified this new operation in the second quarter of '05 and lithography in the fourth quarter. So that in effect reduced the originally reported results for Opto from 96.8 million down to 93.4 million, a roughly 3.4 million reduction. And then as we move our way through the year, Paul, that will shave about 1.2 million off revenue for the second quarter and 1.9 million for the third quarter and nothing for the fourth quarter.

Okay. And then the, within the income statement there was a 1.5 million or so of other expense. What was that particular item?

That tends to be the, it's a number of things, the largest component would be the impact of FX, hedging the balance sheet exposures.

Okay. And then the question on revenue, Greg, Amorphous Silicon, I guess what, is going to be a full run rate here in Q2?

That business has been running, Paul, in the mid-teens range. And so we, for the past, more than past two quarters, really, 2.5 quarters, we've been capacity constrained and that's come about because of a variety of things. One, the overall volume on the plant has continued to come up. Two, there's been a number of new products that we've introduced and have been introduced by our customers into the plant. And every time you introduce a new product, you end up with lower yields on the new product. It takes some time to mature the process. Three, new tools that we've bought over the past several years, and there's a fair lead time on these, take about a year to qualify.

And the qualification process itself actually consumes capacity because you have to run a lot of engineering lots across these and so therefore, if you think about it, it consumes plate starts within it. So as we look at the percent of tools quantified and what the yields are doing, that gives us visibility into what the output, projected output will be in the plant. So, even in the mid-teens, I would say, we're still operating, we're not operating at, we're not sort of getting to all the demand that's out there. But clearly it's ramping up. It's ramping up from there.

And I guess the weakest in market has been pharmaceuticals. And I think you're saying, what, that that market is better or not?

I think we're saying the pharmaceutical market is about the same. I mean, as I look at it, as I look out at the end markets and what the major pharma companies are doing, I don't see a significant change. And I don't expect to see changes in that market quarter to quarter. I mean, I think you can get a difference in a particular company depending on what their priorities for spend are within the year. But the overall macro economic environment for large pharma has not changed.

Are your comps easier now, I guess, or what?

No, I think it's a little bit that and I think it's also us being able to change. There's still a big spend out there. So while the spend isn't growing as it did in years past, there's still a big spend. And the spend shifts in terms of its mix. So for us it's really a matter of tailoring our product line to the mix that's a hotter purchasing priority out there. So that's what gives us a better visibility into it.

You expect your operating margins pro forma to expand in '06, Greg?

Yeah, absolutely. We have said we'd be 75 to 100 basis points and we expect to see that.

Okay.

For the year.

Okay. Thanks.

Thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Derrick bruin of UBS, please proceed.

There was a lot of static on my line so forgive me if I didn't quite catch all of the guidance comments.

Okay.

But what was the, are you still maintaining the 5 to 7% organic growth rate target for the year?

Yeah, Derrick, this is Jeff. I think what we're saying is that we're comfort with the 5% organic growth estimates for the full year.

Okay. All righty. Could you just talk --

And, Derrick, I would say sort of, as you think about how we built that up, we look at the sequential flow through the year. I think we're still comfort with the dynamics of the way it builds up. But given the fact that this quarter was pushed out a little bit, it has a [liftimatic] impact on the top end of that range.

Sure, of course.

One thing just to follow up on what one of the previous, I think Paul Knight had raised the question, if you look at kind of the organic comparisons by quarter, the first quarter of '05 was by far our strongest quarter with almost 6% organic growth. Those comparisons get easier as you work your way through the year, which is slightly different than some of our competitors who had, let's say, much lower organic growth comparisons in the first quarter of '06 compared to the first quarter of '05.

Right. Right. I guess, any other thing about the comments on share buyback, I didn't catch those either.

The comment on share buybacks, Derrick, was that we have repurchased 6.1 million of the approved 10 million shares that we have.

Okay.

And so basically we repurchased 5 million shares in the first quarter. So we have another 3.9 million left in the approval.

Okay. Could you just give us comments about the environmental and the chemical markets, I guess where are you seeing some of the biggest growth opportunities and what are biggest products driving that?

Derrick, it's Greg, the biggest opportunity environmental chemical is China and India. You know, period. And it's interesting when you look at that business, it has a more balanced geographic distribution than any other business we have with Asia/Pacific representing a forward equal comparison to both Europe and the U.S. And the Asia/Pacific market continues to grow more rapidly in that area. So ultimately it will be the largest piece of that marketplace. I think it sort of starts there geographically and then across the different techniques. You can kind of think about what those markets most value at this stage. There aren't a lot of sophisticated pharmaceutical companies there, but there are a lot of food companies, there's a lot of water, there's a lot of pollution, there's a lot of air concerns. So some of the inorganic and even some of the organic techniques do pretty well over there.

Great. Thanks a lot.

Okay.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Ross Muken of Deutsche Bank. Please proceed.

I wanted to talk about uses of free cash flow.

Okay.

In the quarter, obviously, there was some share repurchase. You guys have talked about, in the past, being more aggressive from an acquisition standpoint. And there was obviously a large deal announced yesterday at a pretty good valuation. Can you talk about what you're seeing in terms of acquisition availability, how is your pipeline, and if you're still prioritizing that in terms of uses of free cash flow?

I would say, it's Greg, Ross, it is our first priority, where we think we can invest the money at a good return. And we have a very broad pipeline. It's mostly centered around technology and product extensions, around our growth platforms. We do look at some larger opportunities. But I would say the pipeline heavily centers around the product and technology. We did one this quarter which was Agilix, recently. We expect to do more and pick up the pace of some of those as we go through the year. But a lot of extensions in both [INAUDIBLE] with the potential opportunity to look at something bigger if the valuation of the economics are right.

And in terms of new product introductions that we'll likely see in the back half of the year, would you say it's really going to be sort of across the platform or will we see more in some of the areas and markets that have been stronger for you in spectroscopy, et cetera, more so than biopharma?

Well, I think what you'll see out of, and I'll ask Rob to comment on this as well. But the new products you're going to see across the board, you're going to see them in the Amorphous Silicon business, continue to come out of there, flat panels. You're going to see them in environmental and you're going to see them in the biopharma business. And the biopharma business will probably be heavily centered around the reagent side of the portfolio. But, Rob you want to comment in more detail?

That's what I was going to say. I would say, while I think it will be across the board, I think you'll see a much heavier emphasis on the reagents than you will on the instruments, because that's really where we're focusing our attention. And as I mentioned before, it's really around the cellular assays, and it's really in the proteomics area. So I think that's where you're going to see a number of new products. And of course the nice thing about that is you get, hopefully, much higher velocity on those products and our goal is to sort of step that up fairly significantly in the next couple of quarters.

One thing you guys haven't talked a lot about is pricing. Some of the other companies have seen fairly good pricing environment across the board on instruments and especially on new products. Is that going to be part of the story going forward as well for you guys, now that the new product cycle should be accelerating?

I think any time you have a new product that has differentiation in the marketplace, relative to the existing product line, you have an opportunity for pricing. I think on the products that are well established in the marketplace, there continues to be, I'd say, a reasonable amount of pressure against raising prices in those areas. So I think really for us, anyway, we view it mostly as an opportunity in the new product arena.

Thanks, guys.

Along with the services area, yeah.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Darryl Pardi of Merrill Lynch, please proceed.

Hey, good evening.

Hi Darryl.

Biopharma has been a challenge for several years now. And high throughput screening and rad reagents seem to be mentioned most frequently as the culprits. But there's a lot of other product lines in biopharma. Could you discuss in more detail which are the challenging product lines? It just seems to me those two businesses would have evaporated at this point if they were the only two businesses declining.

I think the way you can think about the biopharma business, Darryl, you sort of hit on two of the more important ones. You've got the rad reagent, you've go high throughput screening. You've got some proteomics instruments in there. You've got some genomics instruments and then you've got nonrad reagents. And so the challenge ones are the ones that you alluded to. Rad reagents, obviously, is a market that's probably going down, declining mid single-digits. I think the other one is, while high-through put screening, I think, is a pretty good market, it's not seeing the growth characteristics of some of the other markets that I mentioned, like cellular and high content screening. I would say the other one where I think -- so if you step away from biopharma, I think one of the issues you initially come away with is it's fairly diverse and potentially too broad. And I think within biopharma we may have historically trying to do too much.

So one of the other things we're trying to do within biopharma is improve the execution, get new products out, expand geographically. But I think also de-emphasize some of the product lines. And the ones that I'm specifically referring to is potentially on some of the areas in proteomics instrumentation. So we had, a couple years ago, went down the route of some spotters and [raised] that I think increasingly is an area that we will probably deemphasize and emphasize some other areas. So obvious these are relatively small product lines and so we are not going to show them as discontinued. But that is also one of the things that is pressuring the biopharma revenue comparisons year-over-year, as we try and focus in those areas where we think we can invest and get significant growth and deemphasize some of those other ones. So that's probably the other one that we don't talk a lot about. But, also we're trying to shift what we do in proteomics into more on the reagent side, I think, and a little bit away from some of the places we've been historically from an instrument perspective.

Okay. When you say deemphasize, do you mean abandon product line or pull marketing and sales resources from?

Yeah, I think when you do one, it in essence results in the other. So I think we are de-emphasizing and eventually it will probably go away.

Okay. And Jeff, could you explain what the common share count was when you exited the quarter?

We exited the quarter with roughly 127 million shares, Darryl.

Great. Thank you.

You're welcome.

Thank you very much. [OPERATOR INSTRUCTIONS] Our next question comes from the line of John Sullivan of Leerink Swann. Please proceed.

Can you talk about the pharma QAQC market and the importance of that market to PerkinElmer? And maybe talk about the whether this is the year that process analytical technologies are going to be adopted more broadly into pharma QAQC. And what are your products or product areas that are relevant to PAT?

Well, John, this is Rob. I'll take that one. So, QAQC continues to be a good market for us. I think we do relatively well there. The products that we have in that offering are a liquid chromatography, UVIR are fundamentally the products we do there. We do a little bit of [lens] work around the QAQC pharma business but it's relatively small business for us. It continues to be an important market for us. We continue to invest in it. I think as well, as far as the in-line testing, I think there are some pharmaceuticals that are sort of looking at that. But I guess I'm not very optimistic that it gets adopted this year, I would say, broad-based across the industry. But I think there are a number of companies that are looking at this. But I'm not sure, at least we're not planning on seeing a significant adoption of that in '06.

Okay. Thanks very much for that. And then shifting gears, regarding the services business and the OneSource business, is that a RFP business to any extent? Are some of the original contracts that you're signing rolling off and do you have to rebid those contracts? How does that business work?

John, it's Greg. So, the OneSource service business is a mix of contract and bills and material and billing. And so the contracts come up for renewal typically on an annual cycle. Some are multi-year. The larger ones would be on a multi-year basis, but otherwise they'd typically roll off on an annual contract renewal process.

And you've had a good growth in that business. Why has the business been so good for you? Is it new ground? Is it still converting customers from having insourced this function or is it a market where you're now taking share from other -- ?

I think it's a mix of all the above. I think we have very good execution in terms of speed of response and breadth of application that we can provide to the customers. And our growth is driven by a higher conversion rate from when they come off warranty to move them on to contract. So we're getting a higher conversion rate than we used to in the past. The net of all that is we retain more of our installed base than we have in the past. So we sort of squeezed out third parties. The other area for growth, the other two areas for growth are offering additional services like validation, which is continuing to expand, and then to do third party servicing, which is continuing expand. So while those two are smaller areas relative to the main piece of business, they have a higher growth trajectory for us going forward and will become a larger piece. So that's what really is going to continue to provide the fuel, if you will, for growth in that marketplace.

You must look at this business and see the opportunity as insource. What portion of the market do you think has converted from insource to outsource?

Well, I'm not sure I characterize it that way. Let me try this, which is that we're dealing with sort of, I'll call it group of normal-size customers out there, which is to offer more value-added services. Get them on contracts, offer more value-added services. Then there is a group of customers, I'd say very large customers where it's an opportunity to provide sort of OneSource of service. That is take over a particular lab, no matter what brand of equipment is, and provide everything from asset management to qualification to repair and on-site technical support for those customers. So if that's the insource versus the outsource, I would say that is just beginning in terms of its development. So there's, I think all the large pharm and some of the other large companies are looking at that more and more, but there's still more sort of talk around that than there has been actual. So I think that's just that I can't give you a percentage, but I'd say it's very early days for where that market is going to go. Yet we're pretty confident it will ultimately go that way.

Thanks very much.

Okay. Thanks.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Ezavi Vitel of Atlantic Equities, please proceed.

Hi, good afternoon.

Hi, how are you?

Good. I have a question on growth margins. Firstly, why were they down this quarter? And secondly, are you taking any specific manufacturing initiative to address growth margin expansion?

Yeah, this is Jeff. Gross margins are down for two reasons. One, at LES they're down year-over-year as a result of foreign exchange, foreign exchange rates because of the stronger dollar. We suffered a little bit more in gross margin, although most of that was made up with savings as it relates to SG&A, when you get a corresponding increase for a stronger dollar. So that was almost neutral within the LES income statement. Optoelectronics the margins were down almost exclusively as a result of the capacity issues we've been talking about, where the volume that we produced through that factory was down as a result of lower yields. It's a fixed cost facility, so as your yields go down on the number of panels that you ship and manufacture go down, your profitability goes down pretty significantly. So both of those, with the Amorphous first, the expectation is, and our volumes have come back.

We had a much better finish to the first quarter and we are having a much better start to the second quarter yield-wise. So as the yields hold and we produce more panels, naturally the gross margins come back up and we'll have a recovery to historical gross margins in Opto. We would expect the same thing from a FX perspective, we've got a number of initiatives. So we don't expect FX to be as much of an issue in LES. Turning to the second part of your question, do we have initiatives? Yes, we do have initiatives. We have multiple programs across both businesses that are focused on getting the maximum amount of purchase price, savings as we look at our commodity purchasing, both domestically and around the world. We have very aggressive targets to bring in the cost of our raw materials. We focus on our manufacturing efficiencies or the expenses that exist in the plants, trying to look at ways to use Six Sigma and other disciplines to take those costs out while driving the volume up.

And we look at value engineering opportunities. We have fairly complex instruments and we have projects within both business units to look at taking -- putting in less expensive parts for more expensive parts, therefore driving up our gross margin. So that's all summarized in a nutshell. We have very specific programs in place at both businesses with people working very hard on those initiatives. And the plan is for gross margins for the full year to take those up year-over-year and to have that contribute to our expansion and operating margin.

Thank you.

You're welcome.

Thank you very much, ma'am. [OPERATOR INSTRUCTIONS] Our next question comes from the line of Matthew Cowen, PSW, please proceed, sir.

Hey, guys. Just two quick questions. One would be given what you did in the first quarter in terms of the share repurchase, are you likely to complete that 10 million share repurchase in 2006? Is that included in the guidance? And then secondly, I hope this is a obvious answer, but now that you've sold off all the businesses and completed those transactions and with Rob's move over to become President, is it obvious that you guys are spending more time on fixing biopharma than you have in the past? Thank you.

It's Greg. We haven't made any decision on the share repurchases, as I mentioned before. It's about return on investment. It sort of depends on the attractiveness of the opportunity as we see from an acquisition standpoint and that will pace that. We clearly will have strong cash flow this year. And so we also don't want to be in a position where our balance sheet continues to be significantly under levered. So we'll make that decision as we go through the year. I would say in the second point, we are spending a lot of time on the biopharma business, because it's been a drag on our overall growth rate and so there's a lot of initiatives under way to move that up the gross scale. So, yes to your second question.

Okay, terrific, thank you.

Okay.

Thank you very, sir. [OPERATOR INSTRUCTIONS] At this time we have no further questions. I'd like to turn the call back over to Mr.Gregory Summe for any closing remarks.

Thank you, operator. And thank you, everyone, for your questions. We had a good first quarter despite some challenging comparables and are optimistic about our prospects for the remainder of '06. We continue to focus on opportunities to accelerate growth while continuing to generate consistent cash flow and earnings growth. Thanks for your time today and your interest in PerkinElmer. We appreciate your support. This call is adjourned. Have a good evening.

Thank you very much, sir. And thank you, ladies and gentlemen, for your participation in today's conference call. This concludes the presentation and you may now disconnect. Have a good day.