Revvity Inc (RVTY) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 PerkinElmer earnings conference call. My name is Cheryl, and I will be your facilitator for today. At this time, all participants are in listen-only mode. However, we will conduct a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. I would now like to turn your presentation over to your host, Steve Delahunt, Vice President and Treasurer. You may proceed, sir.

Good afternoon and welcome to the PerkinElmer first quarter 2007 earnings conference call. If you have not received a copy of our earnings press release, you may get one from the investor section of our website at PerkinElmer.com or from our toll free investor hotline 877-PKI-NYSE.

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 as an attachment to our earnings press release. To the extent we use non-GAAP financial measures during this call that are not reconciled to GAAP in that attachment, 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. With me is Rob Friel, our Vice Chairman and President of Life and Analytical Sciences; and Jeff Capello, our Chief Financial Officer. I will begin by reviewing the highlights of the quarter. Rob will follow with more perspective on the LAS business and Jeff will provide more detail on the financial results. After that, the three of us will be available for questions, and then we'll close the call.

We're very pleased with the start of the year. We had double-digit revenue growth with accelerating organic growth, earnings came in on forecast, we completed two important cellular science acquisitions and we continued our significant investment in R&D marketing and new capital equipment. We are continuing to see the benefit of our growth investments and enter the second quarter with very good momentum. Revenue in the first quarter was $403 million, up over 13% from prior year, 14% LAS and 11% in Opto.

Acquisitions and foreign exchange contributed about 7%. Growth in the quarter was led by medical imaging, genetic screening and service. All had strong double-digit organic growth. Our non-GAAP earnings per share were $0.24, in line with our forecast range of $0.23 to $0.25 and with consensus estimates.

Adjusted operating margins were flat. Opto was up with good volume flowthrough, while LAS was down due to a big step up in R&D and significant start-up investments in large new service contracts. We expect to reach our operating expansion targets of 50 to 75 basis points for the year, as the margin flow-through should improve as we move through the year.

During this quarter we completed the acquisitions of Euroscreen and Improvision, both of which are focused in the area of cellular screening. Euroscreen is a leading provider of GPCR membranes, cell lines and aequorin-based cellular assays used in drug discovery and research. Improvision is a leading provider of cellular imaging software and live cell imaging instruments that are used in life sciences research. With these acquisitions, along with the fourth quarter acquisition of Evotec which brought the leading high content screening instrument the Opera, we have clearly established the leading capability in the fast-growing field of advanced cellular sciences.

PerkinElmer now provides pharmaceutical, biotech, and academic researchers with a single source for imaging and analysis solution that will help increase their understanding of disease mechanisms at the cellular level, which we believe is a particularly productive path for biological analysis.

In the quarter, we increased our internal investments in growth. R&D spending was up 22% or 50 basis points to nearly 7% of sales as we continue to accelerate our new product introductions. We are seeing significant momentum from our new products. Our JANUS liquid handling platform continues to broaden its appeal. This quarter we introduced new scheduling software, a Luminex integration platform and continued broadening the applications beyond Pharma to diagnostics, environmental, energy and others. We now offer over 28 different configurations.

Our CLARUS 600 gas chromatography line continues to do very well. This quarter, we introduced new GC mass spec configurations. Our thermoanalysis products are also doing well with the addition of our new DMA, or Dynamic Mechanical Analysis product line. And finally as part of our cellular strategy, we are rapidly broadening our reagent line and assays for GPCR and kinases. We believe we have the most complete product lines in the industry.

Turning briefly to Optical Electronics, our medical imaging business grew strong double digits as demand from both diagnostic and therapeutic customers remains strong. Our Santa Clara fab expansion continues on schedule, which is expected to double the plant's capacity over the next several years. We are confident in continued double-digit revenue growth as our applications continue to expand.

In Specialty Lighting, we continue to see very strong growth in our digital flash photography business. We are past the decline of the film business, so with a continued demand for digital camera and camera phones, we are confident Lighting will remain a good growth business going forward.

We will continue on with our growth strategy, investing through research and development and marketing investments, supported by bolt-on acquisitions and share repurchases. We finished the quarter with about $60 million of net debt while funding two acquisitions and buying back 2.5 million shares. We have more than sufficient capacity to continue this strategy. I'm now going to turn the call over to Rob Friel who will provide more insight into our Life and Analytical Sciences. Rob?

Thanks, Greg. In LAS, we feel like we're starting to get some good momentum. This is the fourth consecutive quarter we have increased both our reported and organic revenue growth rate. As I know Jeff will review the quantitative aspects of the quarter in detail, I wanted to briefly discuss the current market conditions and what is driving our growth.

Starting with genetic screening, we continue to experience expansion globally, both in the number of screened babies and in the number of analytes per baby as we did in 2006. A good example is the recent decision by California to add two new analytes -- one for cystic fibrosis and one for biotinidase deficiency. Internationally, we are working with several countries in Europe, the Middle East and Latin America on the planning and implementation of expanded screening programs.

As you know, last year we added a number of new countries, including Russia, Israel, Netherlands and additional provinces in China. We are on track to add at least as many countries this year. In China their 11th 5-year plan, which started in 2007, emphasizes newborn screening as a priority and is driving the uptake of two mandated tests.

In maternal health we continue to benefit from the movement towards offering screening to every pregnant woman. The recent announcement by the American College of Obstetricians and Gynecologists to recommend non-invasive biochemistry tests to all women in the first trimester, regardless of age, is increasing demand for free beta hCG as it is recognized as a superior marker for first trimester screening as a complement with ultrasound. In addition, similar to what is happening in neonatal screening, we are seeing an increase in prenatal screening outside the U.S. as well.

In the biopharma market, we believe drug discovery spending is still in the low-to mid single-digits, with higher growth in selective enabling tools such as cell-based screening and high-content analysis. As Greg discussed, we are investing in this area, as we believe researchers will increasingly find the cellular level an efficient information-rich area for biological analysis. With our recent acquisitions, we believe we will have the world's leading cellular analysis business.

Another area of growth is in the tools and services that can help pharma and biotech companies get more productivity out of their current installed asset base. Clearly this is driving some of the growth in our laboratory services business, but it is also providing growth in our biopharma business. The pressure to do more with what they have is leading to miniaturization, like 1536-well plates; reduced prep time, like no-wash assays; and more sensitive reagents. This in turn is creating greater demand for our automation and liquid handling products, and our more sensitive reagents, like the aequorin-based cellular assays, LANCE, and AlphaScreen SureFire. Furthermore, we are finding that our knowledge of automation, detection, and reagents is particularly helpful to our customers as they look for opportunities to increase efficiencies in the drug discovery process.

While our radioactive reagent business declined less this quarter than previous quarters, we are working on several opportunities in the areas of radio therapeutics and custom synthesis used in metabolic studies to provide new markets to expand this very profitable product.

In our environmental business, several macro trends are driving the demand for our products. Recent food and beverage safety and quality issues, whether it is contaminated pet food or drinking water, is increasing the need for analytical measurement and analysis systems, particularly as we continue to globalize our food sources. The increasing emphasis on environmental monitoring is fueling demand for our ozone precursor and air toxic analysis systems based on our new CLARUS gas chromatography and GCMS platforms.

And finally, the drive for new materials and improvements in existing materials continues to increase growth in our thermoanalysis and molecular spectroscopy products. The trends, combined with the industrialization of China and India, should continue to provide good growth opportunities for this business.

Finally, our laboratory service business continues to do very well, benefiting from the pressures on pharma to improve productivity and asset utilization, which is resulting in an increasing number of them outsourcing the maintenance of their labs and we expect this trend to continue. In addition, as we add capabilities to our service business in the form of validation or relocation capabilities, our opportunities and attractiveness to prospective customers increases.

More recently, we are experiencing interest in expanding what we do to adjacent markets outside pharma and biotech. Consequently, we now believe the addressable markets of our service business is significantly larger than we thought previously. So overall, we feel good about the markets we operate in, and we continue to improve our positions in those markets. Consequently, I believe in LAS, we are well positioned to continue to accelerate our growth rate. Now let me turn the call over to Jeff.

Thank you, Rob, and good afternoon. This afternoon I'll provide some details on our revenue, costs and cash flow for the first quarter 2007 then briefly discuss guidance for Q2 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 am referring to an increase or decrease in that measure during the first quarter of 2007 compared to the first quarter 2006. And to the extent I use any non-GAAP measures, those have been reconciled to the comparable GAAP measure in the appendix to this presentation on our website.

Turning first to revenue, we finished the first quarter 2007 with sales of $403 million, compared to $355 million in the first quarter 2006, representing an increase of over 13%. The combined estimated impact from foreign exchange and acquisitions increased sales approximately 700 basis points. Strength in most areas within our Health Sciences product line increased sales by 16%, driven by our increased level of investments in research and development, business development and capital expenditures.

Foreign exchange and acquisitions provided favorable impacts of approximately 400 basis points each. The [tonix] revenue grew 2% within the quarter, predominantly from the impact of foreign exchange, as we continue to transition into growth applications. By segment, revenue growth increased 14% in LAS and 11% in Optoelectronics. The estimated beneficial impact of foreign exchange was 400 basis points for LAS and 300 basis points for Optoelectronics, whereas the benefit of acquisitions added approximately 400 basis points to LAS.

Geographically, revenue performance was strong across all regions. Revenue in the Americas, which represented approximately 44% of our revenue for the quarter, and revenue in Europe, which represented about 39% of our revenue for the quarter, were both up double digits with good performance across most product lines. Asian revenue, representing about 18% of our revenue for the quarter, increased in the very high single digits, reflecting continued robust end markets and the building of backlog.

Gross margins for the first quarter 2007 were 39.7%, a decline of 20 basis points over 39.9% in the first quarter of 2006. Adjusted gross margins increased 10 basis points. Strong year-over-year performance within our amorphous business expanded gross margins within Optoelectronics, whereas start-up costs on several large service programs depressed to gross margins LAS. The impact of the service margins are expected to return to more normal levels in Q2 '07 as we transition these large service programs.

As Greg mentioned, we closed two more acquisitions within the quarter, further strengthening our product offerings in the cellular area within biopharma. As a result, we recorded a $1.4 million inventory revaluation charge and a $1.6 million in process research and development charge for these acquisitions. In addition, we recorded a $4.4 million restructuring charge principally to rebalance R&D spending as we integrate the acquisitions, and also to prune selected product lines in biopharma.

R&D expenses increased 22% to $27.8 million in the first quarter of 2007 from $22.8 million in the first quarter 2006, reflecting our increased investments in some of our growth platforms. The increase in R&D spending for new product introductions and our recent acquisitions is beginning to generate results and is expected to continue to drive growth in 2007 and beyond.

Selling, general, and administrative expenses were 25.3% in the first quarter of 2007, flat with the first quarter of 2006. Adjusted SG&A decreased 40 basis points. The decline in adjusted SG&A was primarily driven by fixed-cost leverage on higher sales, mix of service revenue, somewhat offset by the impact of acquisitions and foreign exchange.

GAAP operating income for the first quarter was $23.1 million, compared to $29 million in the first quarter of 2006. Adjusted operating income in Q1 2007 increased 13% to $43.1 million in Q1 '07 from $38 million in Q1 '06. Looking at expenses below operating income, net interest expense in Q1 '07 was $1 million, compared to net interest income of $1 million in Q1 '06 due to the reduction in cash balances year-over-year. Other expense, net of $2.1 million increased $1 million compared to Q1 '06 primarily due to the cost of increasing our business development efforts.

The tax provision of $5.6 million for the first quarter 2007 reflects a rate of approximately 27.3%, slightly higher than both full-year guidance and our Q1 2006 tax rate of 24.5%. Non-deductibility of the in process research and development charge and the impact of adopting FIN 48 increased our rate this quarter. Absent other discrete material events, we expect our tax rate to normalize to a slightly lower rate than the first quarter of 2007, depending on the distribution of actual income and other items.

Net income from continuing operations was $15 million in Q1 '07, compared to $22 million in Q1 2006, whereas GAAP EPS from continuing operations was $0.12 compared to $0.17 in Q1 2006. Adjusted EPS was $0.24 in Q1 2007, compared to $0.22 in Q1 2006, meeting FirstCall consensus of $0.24 and in the middle of our forecasted range of $0.23 to $0.25.

During Q1 '06 we closed the sale of our Semicon division of our Fluid Sciences business which generated an after-tax gain of $2 million. GAAP net income was $14.7 million in Q1 '07 compared to $23.6 million in Q1 '06.

Turning to our segment results, I will briefly describe our first quarter performance. All of the revenue growth I will discuss is on a reported basis which includes the impact of foreign exchange and acquisitions. In LAS, revenue in the first quarter was $300 million, up 14% over the first quarter of 2006. On a GAAP basis, LAS operating profit for the first quarter of 2007 was $14.9 million, compared to $23.8 million for the first quarter of 2006. LAS Q1 2007 adjusted operating margins were 10.9%, down 100 basis points over Q1 2006.

In Genetic Screening, which was about 14% of LAS's revenue in the quarter, revenue increased double digits continuing its momentum of growth. We continued to see robust growth in neonatal screening, which grew double digits driven by expansion in the number of disorders being tested as well as increased adoption of our leading-edge technologies, both in domestic and international markets. PreNatal screening also grew double digits in the current quarter compared to Q1 2006, driven by strong revenue growth in NTD Labs as a result of increased adoption of first trimester risk assessment in the United States. In addition, we are seeing strong acceptance of our prenatal offering in the international markets.

Service, which represented about 25% of our LAS revenue in Q1 '07, grew double digits across all territories, continuing its momentum of growth. We are getting great traction in our OneSource business as we continue to generate nice program wins globally. The outlook for our service business is excellent as our customers increasingly see the value proposition of providing solutions to increase productivity, reduce complexity and realize cost savings.

In the Environmental and Chemical Product lines, which represented about 26% of our LAS revenue in the quarter, revenue increased double digits. Robust revenue growth was generated by continued strong reception of our new GC product offering, within air monitoring applications driven by regulatory pressures and in the area of biofuels as customers search for new sources of energy. In addition, our recent product line acquisition and thermoanalysis performed very well, driven by strong material characterization applications, primarily in the chemical end markets. Biopharma sales which represented 36% of LAS revenue in the quarter, increased in the mid-single digits compared to the same period in 2006. Within biopharma, we are beginning to see our returns on our investments both from new products and recent acquisitions.

In Optoelectronics, revenue for the quarter was $103.4 million, up double digits over the first quarter of 2006, led by robust performance in our digital imaging business. Optoelectronics GAAP operating profit for the first quarter of 2007 increased to $16.3 million from $12.7 million in 2006. Adjusted operating margins were 16.8%, which represents an increase of 220 basis points, compared to the first quarter of 2006.

Increased capacity and better operating performance at our amorphous fab had a significant beneficial year-over-year impact on our operating margins, given the fixed-cost nature of that facility. Within Optoelectronics, imaging revenue grew in the high double digits during the quarter, driven by strong customer demand, and improvements in both our capacity and operations allowing us to increase our output. We continued to see strong in-market demand and expect with our investments in this business to be able to continue to generate strong growth.

Sensors revenue increased in the low single digits driven by continued strength in our photodiode and IRD product lines offset by transitions in military operations. Lighting grew in the mid-single digits within the quarter, as strength in our LED product line and flash lamps for digital camera phones was slightly offset by the timing of new products in our other product lines.

Now turning to the balance sheet and cash flow. During the first quarter 2007 we had GAAP operating cash flows of $17.3 million compared to cash outflows of $34.7 million in the first quarter 2006. The first quarter 2006 amount includes one-time tax payments of $54.6 million related to the gains recorded in 2005 on the divestiture of Fluid Science businesses. Despite focus on working capital, we had a 0.3 turns reduction year-over-year on our working capital turns, as flat receivable turns were more than offset by growth investments in inventory. We expect these to come down as we go through the year.

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 rate of investment, spending $11.4 million in capital expenditures, up from $9.2 million last year. We also spent $40 million to fund two acquisitions. In addition, we repurchased an incremental 2.5 million shares for $60 million, bringing our total shares repurchased to 2.5 million out of our approved 10 million share repurchase program. We finished the quarter with total cash of $120 million and net debt, which we define as total cash less short and long term debt, of $60 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 shareholders.

Looking forward to Q2 '07 we expect to continue to increase our growth momentum. We expect revenue growth to be in the low double-digit range with foreign exchange positively impacting growth by approximately 100 basis points and acquisitions positively impacting revenue growth by 500 basis points. On a GAAP base we are forecasting earnings per share from continuing operations of between $0.21 and $0.23, with the impact of stock option expensing expected to be $0.01 and intangibles amortization to be $0.06. Excluding the impact of intangibles and amortization and stock option expense, we are forecasting cash earnings per share from continuing operations of between $0.28 and $0.30 for the second quarter of 2007. This would represent an increase of 8 to 15% over the second quarter 2006 of $0.26 per share. I will now open the call to your questions.

Thank you, sir. Ladies and gentlemen, we will now open up the lines to any questions you may have. (OPERATOR INSTRUCTIONS) First question comes from Quintin Lai of Robert W. Baird. You may proceed. Baird.

Hi, good afternoon. Nice quarter. As we look out -- with especially that Services, do you need to build out your infrastructure kind of ahead of this backlog of services orders that you are getting? And how long do you expect that infrastructure build-out to occur -- or to support this expanding market?

So Quintin, this is Greg. The service investment really comes about, I would say contract by contract. So through 2006, we took on a significant number of new contracts and even into '07, and then every time we do that we have an upfront investment because these typically are multi-vendor repair validation support contracts, so it requires significant investment in getting the customer up and running -- investments in training, investments in equipment, and a number of other program expenses. Now we expect those -- to get through those in a fairly quick sort of two quarter time frame within a particular contract.

Okay. And then longer term, Greg, should we be looking at services with EBIT margins at corporate level or higher than corporate level?

Higher than corporate level.

Okay.

So we expect you'll see service margins improve as we go through the year, and then continue on from there, so it's -- but definitely we think higher than the average.

And then with respect to just some of the end market demands, one of the things you talked about was Asia was up -- I think high single digits. Could you break that out with Japan versus the China and India markets?

Yes. So I think -- it was pretty consistent across many of the countries in Asia. In fact, we had orders performance actually stronger than that, Quintin, if you look at -- we have been performing at a stronger level than that. The issue we had in this quarter is we had a lot of orders come in late in the cycle. Typically, Asia-Pacific has been in the double digits, so it settled down a little lower. But the orders performance would indicate that going forward we're going to continue to progress at the double-digit range. But it was kind of consistent across the various countries.

Thanks, I'll jump back in the queue.

Next question comes from Paul Knight of Thomas Weisel. You may proceed.

Hi, Paul.

Hi, Greg. Hard to find a weak spot in this one.

You're kind. Thank you.

But with that said, what is happening on the reagent side? I know you have been addressing product lines there, and--

Paul, I'll start and turn it over to Rob. I would say that we have been investing a fair amount in reagents, I think, clarifying where the best -- where the most productive targets are for researchers and then trying to build complete catalogs and libraries around those. So we have become sort of the source for GPCRs, the source for kinases. And that's the overall strategy. I think Euroscreen fits nicely with that on the luminescent side. So we continue to build that out. Rob you want to -- ?

I think we continue to make good progress on the reagent side, and of course a big piece of our reagent is genetic screening, of course that does very well. If you look at biopharma specifically I think we continue to make good traction in the marketplace. If you recall in Q4, we came out with a number of new products in the reagent area. We talked about the SureFire and the product around the LANCE -- I think you complement that with the aequorin and it brings us the luminescence technology. I think we feel we have the most complete offering out there.

The weak spot historically has been in our Rad, and as I mention, I think we're seeing some nice opportunities both on the radio therapeutics, as well as some of the custom synthesis to take into the metabolic studies, that we think we can maybe turn right around, and at a minimum keep it flat and maybe grow it a little bit. So I would say we've made good progress on the reagent side.

I know '07 is kind of a organic build year for life science, but, at 10.9 operating margins there, what do you think the margins should be in the years ahead? I won't nail you down to a year even.

Paul, I think we all recognize that has significant growth potential, so I'll turn it over to Rob who will expand on that path.

Yes, so Paul -- in this quarter, if you actually looked at our product margins, particularly on the gross margin, we did get good flow-through there. So I think we feel confident we will continue to do that. I think the issue in the quarter is we put a lot of money into the service business, particularly on the gross margin side. There's a mix issue there as well as the investments that went in there. So I think as you see us go forward here we'll grow out of this and look for good expansion later in this year. I think -- as you about the businesses we operate in, and the customer profitability, we should be mid-to-high operating margins within LAS here.

And then lastly, Jeff, what was that tax rate that you mentioned earlier? The tax rate on continuing ops in Q1?

I think the tax rate was roughly a shade over 27% for the quarter and that was pushed up because we had an in process research and development charge which was not deductible for tax purposes. It creates a dislocation between your book income and your tax income. That will be muted, if you will, as you work your way through the year because it'll be applied against a bigger -- as income comes in from the other quarters. So I would be thinking about a tax rate, I think we guided to 24.5%. I think it's probably a little bit higher than that, maybe in the 25s at this point for the full year.

Okay. Thank you very much.

Thank you.

Next question, Derik De Bruin of UBS. You may proceed.

Hi, Derik.

Hi, good afternoon. So it certainly looks like that execution's been improving. That's really nice to see. Nice progress in the quarter. Biopharma has always been kind of a sticky point. Once you back out all of the acquisitions in biopharma, what was the organic growth rate? Was it flattish in the quarter?

Yes, it was roughly flat.

Okay. That is better than double-digit declines from prior quarters. And same thing with Sensors?

Positive on the sensors--

A little bit positive, yes.

Great. What was the share count at the end of the quarter? You bought back 2.5 million shares, which was a little faster than I thought.

So we finished the quarter with 120.7 million shares outstanding.

Great. And I guess when you look around at other M&A activity that's going on, are there other additional little, small deals like you've attached on your screen that are out there, I guess? How do you tend to focus your M&A gun.

I would say our M&A has been focused on smaller to medium-sized opportunities for a couple of reasons -- one, because we are focused around organic growth. So we're looking for selective products and technologies that have good organic growth. So they're growth accretive, and we had to take them and give them worldwide distribution or we can broaden the product line or we can provide a complete system. So I think for that reason. Second reason is they tend to be a little lower risk on terms of the integration. And then third reason is the valuations are better than we have found on the larger sized deals. So all of this is subject to change, depending on what opportunities come along, but so far we have been working the pipeline hard, looking for not so much to broaden out our portfolio, but if you will, to build sort of the relative market shares within each of the businesses that we're in now.

Great. Thank you.

You're welcome.

Next question, John Sullivan of Leerink Swann. You may proceed.

Hi, guys. I had a little bit of follow-up question on Derik in biopharma. Can you talk about the markets in biopharma that are growing most quickly? Is it cellular analysis or are there other markets growing markedly quicker than the others in biopharma specifically?

John, I think it is the cellular market that right now as we see it is the emphasis, as we mentioned. I think our view is it's low-to-mid single growth across biopharma. But I think there are specific areas. Some of these enabling tools -- there seems to be a big emphasis and focus around the cell-based screening. And so we're seeing some nice growth there, and I think that's probably the area where we would sort of focus on in the future.

Who is the customer in cell-based screening traditionally? Which areas of the institutions?

I think there's a little blurring quite frankly between the drug discovery and the drug development. I think from the high content in the cellular side, there's actually a little bit going on in both areas. So one other area I was going to mention where we're seeing nice growth is in the automation and liquid handling, and I think some of that is our new product offering. The other aspect of it as I mentioned before -- I think on the whole productivity push within pharma, I think they are looking to automate their sample preparation. And I think that's driving some nice growth as well. So I would spike those two areas out.

The automation and liquid handling -- is that an OEM business for you to any extent? Or is it to end users?

It's to end users.

Okay. Thank you very much.

You're welcome.

(OPERATOR INSTRUCTIONS) Next question comes from Vishal Saluja of Seligman. You may proceed.

Hi.

Hi, thanks for taking my question. Great top line. I just want to understand specifically when we start getting some leverage on the bottom line as you say you delivered the results on the top line, and specifically as it relates to some of the service start-up costs. Is it something we should expect in Q2 as well and then start to get some leverage in Q3? Can you just walk us through that?

So, this is Jeff -- expect to see that I think as Greg and Rob had mentioned that the service programs take a little bit of time to kind of get started so we got through the first quarter. It's probably a little bit of an impact left for the second quarter, although not dramatic. I think you should expect to see operating margins start to move in terms of expansion in the second quarter and then really begin to accelerate in the back half of the year. The other thing to recognize is we took up our operating expenses consciously in the back half of last year -- R&D and SG&A. So we are cycling through kind of some tougher comparables as we work our way through this year in terms of spend and we're doing that against lower revenue, because the revenue picks up seasonally as you go through the quarters. So there's a natural benefit given that a lot of these expenses are in place. But as we move our way through the year, they're in the prior year period in the back half of the year, and we'll have higher revenue of which they'll be compared to. So there's a natural lift that the volume will produce, as well as kind of the reoccurring nature of those costs that will cycle up against in the back half of the year that will make it a little bit more conducive.

So for modeling purposes, does R&D as a percent of sales start to drift down a little bit, or is this a pretty good level?

It doesn't drift down. It just doesn't increase. We're up pretty significantly in R&D. We're up over 20%. That is not the plan for the full year.

I would say to your point -- as a percent of sales for the first quarter, just a down little bit as we go through the year from 6.9 but not as a percent.

Not year-over-year. There will be a slight year-over-year increase, but not to the extent we experienced in the first quarter.

Got it. And just a last question for any of you, which is that you all have been pretty active on the acquisition front, and luckily it seems like there's nothing too dilutive here. But want to get some sense of how successful you have been with the integrations and whether the collective growth rate on an organic basis for these acquisitions is meeting your internal milestones?

I would say we feel pretty good about it. We spend a lot of time on the acquisition integration side. We do a lot of effort to think that through ahead of time and so when the deal does close we're ready to go. As I mentioned, we're targeting fairly specific properties, and so the properties are small, contained, and tend to be in fairly narrow product lines. So they bolt on to the existing products we have.

Our philosophy here has not been to take a lot of cost out of these acquisitions, because these are growth-based acquisitions. So really we treat them with a little bit more of a pull-based strategy, which is -- so we acquire the business, what resources can we provide to that business to help them accelerate the growth. As opposed to cost consolidation play where we're bringing them in and taking out a lot of cost. It's part of the reason that when you see the P&L this quarter, you see the restructuring charge, because if we would have taken the cost out of the acquisitions, it would have gone against goodwill. Actually in that case, we did recognize or did rebalance some R&D, but we took it out of the existing PerkinElmer structure. So our philosophy is really to buy these businesses and then allow them to pull the resources they need from us to accelerate their growth.

Got it. Thanks a lot. Congratulations.

Thank you.

Next question from Vivek Khanna of Civic Global Healthcare. You may proceed.

Hi, good evening. Just wanted to get a sense if you could give the growth rates by geographic region on an organic basis, if you had those. And then within drug discovery, I was wondering if Rob or you, Greg, could talk about how the spectroscopy in the drug discovery business, and then the radioactive business do? And then finally, were these acquisitions at all dilutive on the quarter? Just wanted to get some sense on that. Thanks.

Okay. If I remember your questions, I think the first question was geographically organic revenue growth?

Yes.

So the Americas we had high single-digit organic revenue growth, Europe was mid-to high -- mid single digit organic revenue growth, and Asia was mid-to-high organic revenue growth.

Okay, thanks.

There appears to be no further questions at this time.

Operator -- we're still answering this question.

Vivek, I guess the question with regard to biopharma -- I don't think we're going to get into the detail by product line and talk about specifically Rad versus molecular spectroscopy, versus some of the other product lines.

As we mentioned before, I would say biopharma generally was sort of flattish on an organic basis. It was up on a reported mid-to-high single. I would say if you looked at it from the research versus the academic, I think it was pretty consistent across both.

And I think molecular spectroscopy continues to be a good business for us. HTS screening continues to be a good business -- doesn't have the same kind of growth as cellular. Rad is of course always been a bit of a negative, and so we have to offset that with the growth in the other areas. So if that gives you some feel, we don't see the market changing dramatically out there. The pharmaceutical companies are doing better. I don't know that they're changing their CapEx spending dramatically at this time, but I think in general there is sort of a positive direction here. Whereas the biotech spending continues to be good, and as you know on the academic side, the spending has shifted a little bit more toward kind of the drug screening area, or drug development area, as stimulated by NIH priorities. So we think -- to go back to Rob's point -- we think the whole drug discovery, when you put all that together, is still low-to-mid single digits.

Okay, thanks.

Does that help?

Yes, that's helpful. And were these acquisitions dilutive at all or they weren't a drag in the quarter just because you just bought them?

From a growth perspective, they were accretive.

Right.

And from a bottom line perspective, I would look at them as more or less neutral for the quarter. And then, given that these are smaller companies, as Rob had said -- the growth was very helpful. And as they continue to grow, they will help us expand our margins going forward.

Thank you.

You're welcome. All right, operator, I didn't mean to cut you off before. Are there any other --

There are no further questions at this time.

Okay. Everyone, thank you for your participation and interest in PerkinElmer. We had a good first quarter and believe we're well positioned to accelerate the growth of our business and to deliver significant value through the remainder of 2007. This call is adjourned. Have a great evening. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a wonderful day.