Revvity Inc (RVTY) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2007 PerkinElmer earnings conference call. I will be your operator for today. At this time, all participants are in listen-only mode and 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 the call over to Steve Delahunt, Vice President and Treasurer. Please proceed, sir.

Good afternoon, and welcome to the PerkinElmer second 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, 1-877-pki-nyse. Please note this call is being webcast live and will be archived on our website until August 9th, 2007.

Before we begin, we need to remind everyone of the Safe Harbor statements that we've 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 those 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 measurements 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 to discuss our second quarter results. With me is Rob Friel, our newly appointed President, and Jeff Capello, our Chief Financial Officer. I will begin by reviewing the highlights of the quarter. Rob will then follow with more perspective on the Life and Analytical Sciences 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 will close the call.

We were very pleased overall with our results in the second quarter. We had another quarter of good double digit revenue growth, with very strong and broad-based organic growth. Five of our seven businesses had excellent growth.

Our earnings came in at the high end of our forecast and we continued our growth investments in research and development, marketing and new capital equipment. We are continuing to see the benefits of our investments and enter the third quarter with good growth momentum.

Some of the highlights, our revenue in the second quarter was up 16% over prior year, 17% in Life and Analytical and 13% in Opto. Acquisitions and foreign exchange contributed about 7% to that overall number. This is our highest organic growth rate since 2000, when we had the benefit of telecom and the human genome project helping drive the markets.

Growth in the quarter was led by medical imaging, genetic screening, environmental and service, all with strong double digit organic growth and specialty lighting also had strong growth in the quarter, driven by flashtube sales for digital cameras and high resolution camera phone markets.

Our cash earnings per share were $0.30, up 15%. And we generated strong cash flow, $70 million of operating cash flow in the quarter. We deployed some of that cash by buying back about 3.5 million shares and increasing our capital expenditures by 32%. And this spending was heavily focused on the expansion of our medical imaging capacity. We finished the quarter with $85 million in net debt and retain excellent flexibility to fund growth and return capital to shareholders.

Our recent acquisitions continue to do well. NTD Labs had an excellent quarter as we saw acceleration in the demand for first trimester screening, driven by the increased awareness of free beta hCG as the leading risk assessment. Spectral Genomics also reported strong revenue growth in the quarter, as we see growing adoption of their karyotyping solution for chromosomal disorders.

In the environmental business we continue to see very good response to our recent launch of the RamanStation 400 Raman Spectrometers, which was part of the Avalon acquisition, and the DMA or the Dynamic Mechanical Analysis 8000 for thermal analysis which we acquired from Triton.

During the quarter, we completed a licensing agreement with Axxam, which gave us exclusive rights to Photina, a luminescent assay for cellular screening. This agreement builds upon our recent acquisition of Euroscreen and its innovative aequorin-based cellular assay platform.

Overall, we remain very pleased with the progress of our recent acquisition and our deal pipeline is in good shape. We anticipate being able to continue buying small to medium-sized businesses that are accretive to our revenue growth rate and our EPS in the fairly near term.

Turning briefly to optical electronics, our medical imaging business grew strong double digits and we shipped a record number of flat-panel x-ray detectors. Demand from both diagnostic and therapeutic customers remains very strong. Our Santa Clara fab expansion remains on schedule and is expected to double the plant capacity over the next several years. Imaging has an excellent outlook for growth.

In the quarter, we also announced the receipt of multiple orders for mobile phone flash assemblies using our xenon-based flash technology. Xenon is being increasingly recognized as a critical technology to enhance the performance of high-end mobile phone cameras.

We have been in development with this technology for several years, and are beginning to see significant adoption in the new high resolution camera phones which are coming out. You can shortly expect to see camera phones coming on the market that function as well as digital cameras, with xenon flash, optical zoom, and picture processing software. In Q2, we had high program costs for this, which offset what otherwise would have been very strong operating margin expansion in Opto. But we believe we will see the benefit to this investment in Q4 and beyond.

Today we announced the initial step in a phased two-year leadership succession plan for PerkinElmer. The first step is that Rob has been appointed President of the Company, effective August 1st. Subsequently we expect Rob to be elected Chief Executive Officer on February 1st, 2008, at which time I will become the Executive Chairman of the Board. I will stay in that role through the annual shareholders meeting in April of 2009.

This plan is consistent with my desire to transition from the CEO role at the beginning of 2008, which will complete my 10th year with PerkinElmer. I have been working closely with the Board over the last several years on this succession plan and I believe now is a good time. We have excellent momentum across all of our businesses. The markets are good. We have a deep and experienced leadership team and we have an excellent leader in Rob.

I have worked very closely with Rob over the past nearly nine years at PerkinElmer. He has been a key architect in our transformation. He has done a great job as our CFO, as President of Life and Analytical Sciences and as a Director. He's ready to move into this role and I feel very fortunate to have a leader of Rob's talent as my successor. We will be working very closely together over the next two years to make sure this is a very smooth transition. I will now turn the call over to Rob to provide insight into our Life and Analytical Sciences business.

Thanks, Greg. As we have done the last few quarters, I will briefly describe the market trends that are impacting the LAS business, comment on several of our key priorities and then turn it over to Jeff, who will discuss the actual financial results for LAS in more detail.

Turning first to the trends impacting our environmental and chemical analysis business, we experienced strong industrial markets, particularly in the chemical and petrochemical segments, that are providing good underpinnings to the overall business. In addition, I would highlight three global trends that are further impacting our business favorably.

First of all, the increasing consumer awareness and media attention on food safety and quality are driving the need for a significant increase in testing and monitoring globally. This is therefore driving demand in a number of our products used in food analysis.

The second area is the continued emphasis in developed countries and growing emphasis in developing nations on cleaning up the environment, particularly as public opinion is driving more environmental monitoring and regulation. Due to the breadth of our technologies we are uniquely positioned to provide products that can detect organic, inorganic and radionuclide particles. Also related to this initiative to clean up the environment is the drive for new, more energy efficient materials, which is favorably impacting our materials characterization business.

Finally, strength in the semiconductors and electronic markets due to both increased regulations and consumer demand is fueling demand for better metals analysis and improved QA/QC tools.

In addition to the favorable market trends, our growth is helped by a number of new products introduced recently that are focused on these higher growth applications. Two examples are the new Clarus 560D which is a GC mass spec that uses the Clarus 600 mass spec technology and is sold into the price sensitive environmental market. And the Spectrum 400, which is unique in that it combines near infrared and mid infrared in the same instrument, is sold into the materials characterization market.

In our laboratory science business, as our customers face increasing cost pressure and the need to increase scientific output with less staff, the consolidated service provider model is gaining increased acceptance in the market as a way to better control maintenance costs. Of the top 20 biopharma companies, 15 have engaged with a service consolidator or are currently exploring this as an opportunity to improve productivity.

We currently work with 10 of the 15; and for a number of these customers that have used our OneSource in a specific location, they are expanding into multiple site contracts as they not only recognize cost savings, but improved uptime and better information regarding maintenance spend.

Consequently, there's a growing acceptance of outsourcing other activities, like calibration, training and equipment relocation. Furthermore, new markets outside pharma, such as food and beverage and consumer product companies, are expressing interest in these types of solutions as well. Finally, with regulatory demands continuing to increase, there are growing opportunities to provide integrated validation solutions.

In the biopharma research area, we see overall R&D spending increasing. However, in the area of drug discovery, budgets appear to be flat year-over-year as the spending increases appear to be more focused in the preclinical area.

On the reagent side, kinases and GPCRs continue to be an important target, with nearly 75% of all drug discovery targets falling in these two classes. We have recently consolidated our offerings in these areas with a broad range of assay technology platforms, and in the case of GPCR area, a deep portfolio in terms of content. As drug discovery efforts increase in these target classes, we are seeing a corresponding increase in the adoption of exclusive photoproteins for GPCRs and LANCE Ultra and SureFire technologies for biochemical and cell-based kinase assays.

We are also seeing an increased adoption of our AlphaLISA technology, as a viable alternative to ELISA assays for preclinical biomarker detection, due to the ease that our technology can be automated using liquid handling systems such as our JANUS.

In liquid handling we continue to improve the flexibility of JANUS with the introduction of new scheduling software, as well as adapting it for additional applications in adjacent markets like diagnostics.

In the research radiochemical market, the overall trend continues to move away from radioactive detection. However, we are seeing an increase in demand for custom synthesis. This is due to the fact that both our large pharma and biotech customers are increasing outsourcing of the synthesis of radiolabelled compounds for use in ADME/tox studies as more compounds are entering preclinical and clinical evaluation.

The market trends in genetic screening continue to be strong as clinicians increasingly recognize the benefits of early risk assessment so that disorders can be predicted and treated as early as possible. This is happening in both prenatal, as the trend is moving towards first trimester, as well as neonatal where you may have seen recently March of Dimes announce that 88% of newborns in the U.S. are screened for 21 disorders, up from 38% in 2005. And these trends are not restricted to the developed world, as the importance of early screening is gaining acceptance globally. In the second quarter, our genetic screening business grew faster outside the U.S. and Europe.

So overall, most of the market trends impacting our products continue to trend positively. And our goal is to continue to evolve the portfolio to the most attractive market segments through both internal as well as business development activities.

In addition, we will continue to expand our efforts to provide more complete application packages versus individual products by linking or combining a number of technology platforms. And we are continuing to improve our execution, whether it's our responsiveness to customers, manufacturing of our products, or the efficiency of our R&D efforts.

In summary, we believe some of the investments and changes we have made over the last few quarters are allowing us to take share and regain good momentum in our markets. Consequently, I continue to be optimistic about our ability to overall grow revenue faster than our underlying markets.

Before I turn the call back to Jeff, let me just say how excited I am about the opportunity to lead PerkinElmer. The Company is in great shape with talented people and a lot of positive momentum. I have been here almost nine years and I believe we have more opportunities to create value now than we ever have. Now, I let me turn it over to Jeff.

Thank you, Rob, and good afternoon. This afternoon, I will provide some details on our revenue, costs, and cash flow for the second quarter of 2007 then briefly discuss guidance for Q3 and full year 2007 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 second quarter of 2007, compared to the second quarter of 2006. And to the extent that I use any non-GAAP measures, those have been reconciled to comparable GAAP measure in the supplemental tables in our earnings release.

Turning first to revenue, we finished the second quarter of 2007 with sales on a reported basis of $437 million, up 16% compared to $377 million in the second quarter of 2006. The impact from foreign exchange and acquisitions increased sales by 3% and 4% respectively.

Life segment, revenue growth was 17% in LAS and 13% in Optoelectronics. Acquisitions and foreign exchange positively impacted LAS by 5% and 3%, while the impact of foreign exchange contributed 2% to the growth of Optoelectronics. The remaining revenue growth comparison is on a reported basis including the impacts of foreign exchange and acquisitions. Geographically, revenue in the Americas, Europe and Asia each grew double digits, displaying strength in all regions and represented approximately 43%, 38% and 19% of our total revenue respectfully.

Gross margins for the second quarter of 2007 were 39.9%, compared to 40.2% in the second quarter of 2006. Adjusted for stock option and amortization expenses, gross margins were roughly flat year-over-year. Gross margins in this quarter were adversely affected by one-time start-up expense associated with our mobile phone flash program and investments in some of our service programs which collectively depressed margins in excess of 100 basis points within the quarter. Without these expenses gross margins would have expanded due to volume leverage, net productivity and better mix of sales.

R&D expenses increased 9% to $27.3 million in the second quarter of 2007 from $25 million in the second quarter of 2006. The increase was driven by the acceleration of activity around new product introductions in our growth platforms and the impact of acquisitions. The increase in R&D reflects our continued commitment to invest in our growth platforms. We expect our R&D investment will continue to grow at a slower rate as we move forward throughout this year.

Selling, general and administrative expenses were 25% in the second quarter of 2007, up from 24.6% in the second quarter 2006. Adjusted for the impact of stock option and amortization expense, SG&A expenses were flat year-over-year. The increase in selling, general and administrative expense was primarily driven by the impact of acquisitions, foreign exchange and specific growth investments, slightly offset by the benefit of increased volume.

Within the quarter, we had a net gain of $15.3 million from the final proceeds of a fire settlement and expense of $4.5 million associated with lease expenses on a prior divestiture.

GAAP operating income from continuing operations for the second quarter of 2007 was $48.1 million, compared to $35.7 million in the second quarter of 2006. Adjusted for intangibles and amortization, stock option expense, restructuring, revaluation of acquired inventory and lease activity, as well as the fire gain, operating income in Q2 '07 was $50.8 million or 11.6% of sales, down 40 basis points from Q2 '06, driven primarily by the factors discussed above in gross margins.

Looking at expenses below operating income, interest income net of interest expense in Q2 '07 was $2.4 million of expense, as compared to interest income of $100,000 in Q2 '06, due to increased debt holdings driven by acquisitions and share repurchases, somewhat offset by continuing strong cash generation. Other expense of $1.1 million is down from $2.6 million in the second quarter of 2007 due to higher deal-related expenses in the second quarter of 2006.

The tax provision of $11.4 million for the second quarter of 2007 reflects a rate of approximately 25.5%, compared to a rate of 22.3% in the second quarter of 2006. We expect our tax rate to be approximately 25% or lower during the remainder of the year depending on the distribution of actual income and other items.

Net income from continuing operations was $33.3 million in Q2 '07 up from $26.3 million in Q2 '06 due to the higher sales volume and the benefit of the fire, net of the lease reserve in the second quarter of 2007.

We repurchased another 3.5 million shares within the quarter which leaves us with 4 million remaining shares under our approved repurchase program. Weighted average diluted shares outstanding for the quarter were 120.7 million shares reflecting the impact of our year-to-date repurchases.

GAAP EPS from continuing operations was $0.28 in the quarter. Excluding intangibles and amortization, stock option expense, fire gain, revaluation of acquired inventory and lease expense, EPS was $0.30 in Q2 '07 up 15% from Q2 '06, exceeding the First Call consensus estimate adjusted for stock option expense and at the high end of our forecasted range of $0.28 to $0.30.

Turning to our segment results, I will briefly describe our Q2 performance. All the revenue growth that I will discuss is on a reported basis. In LAS, revenue in the second quarter was $326.3 million, up 17% over the second quarter of 2006. On a GAAP basis, LAS operating profit for the second quarter of 2007 was $44.6 million, compared to $25.3 million in the second quarter of 2006. Excluding the amortization of intangibles, stock option expense, restructuring charges, revaluation of acquired inventory and fire gain, LAS Q2 '07 operating margins increased 20 basis points from 12.3% in the second quarter of 2006 to 12.5% in the second quarter of 2007. Net [productivity] issues, volume and favorable mix more than offset the impact of service margin pressure described earlier to drive the operating margin improvement.

In genetic screening, which was about 15% of LAS revenue in the quarter, revenue increased in the strong double digits, continuing its strong momentum of growth. As Rob mentioned, we continue to see good momentum in neonatal screening, which grew strong double digits driven by the expansion of our screening platforms. Contributing to the expansion were recent international program wins in Russia and Saudi Arabia combined with the expansion of screening tests for diseases such as cystic fibrosis. Prenatal screening also grew double digits in the current quarter compared to Q2 '06 driven by increased adoption of our tests in Europe. Both our recent acquisitions, NTD Labs and Spectral Genomics, also performed extremely well, growing in the strong double digits, and appear to have very strong momentum going forward.

Service, which represented about 24% of our LAS revenue in Q2 '07 grew double digits as well, continuing its upward momentum. We continue to see very good growth in our base business, as well as increased demand in both our OneSource and multi-year service offerings. The outlook for our service business continues to be very strong as our customers increasingly see the value proposition, providing solutions to increase productivity, reduce complexity and realize cost savings.

Margin pressure within the quarter was created by both increased investments and a few lower margin contracts, both of which are expected to be overcome in the second half of 2007.

In the environmental and chemical product lines, which represented about 27% of our LAS revenue in the quarter, revenue increased in the strong double digits with robust performance across almost every product line. We continue to have very good performance in this area driven by demand to improve air, food, water quality and the pursuit of new chemicals and biofuels.

Biopharma sales, which represented 35% of LAS revenue in the quarter increased in the high single digits over the same period in '06. Within biopharma, certain businesses showed strong improvement in year-over-year revenue growth versus Q2 '06, including liquid handling and some reagent product lines. Liquid handling continues to be driven by the strong acceptance of our JANUS platform, whereas high-throughput reagents and radioactive reagents are benefiting from new product introductions and market stimulation activities, respectively.

Our most recent acquisition within the cellular area, Improvision, performed extremely well and this whole area appears very well positioned for the second half of 2007. We continue to see progress in the portfolio transition within biopharma and expect that progress to continue in the back half of '07.

Within Optoelectronics, revenue for the quarter was $111 million, up 13% compared to the second quarter of 2006, driven by strength in imaging and lighting. Optoelectronics' GAAP operating profit for the second quarter of 2007 was $13 million or at 11.7% of revenues. Excluding intangibles, amortization, stock option expense, restructuring charges and lease expenses, operating margins were 16.7% which represents a decrease of 60 basis points compared to the second quarter 2006. The impact of the start-up expenses on our mobile phone modules had an impact of over 150 basis points as we prepare to scale up this business opportunity.

Our medical imaging business grew double digits in the quarter, continuing its strong performance with record panel shipments. We continue to address capacity issues to meet the very strong customer demand and expect the completion of our fab expansion in 2008 will open new opportunities for our growth.

Our lighting business experienced low double digit revenue increases driven by further penetration into digital camera platforms, as well as flash shipments into camera phones. In addition our LED business had very strong revenue performance as we continue to find good growth opportunities in that space.

Sensors revenue was flat with strong growth in commercial sensors driven by new products, offset by declines in defense sensors due to program changes. Growth in the commercial sensors area was driven by photodiode array sensors for the imaging market, as well as infrared sensors for gas sensing and motion security markets. Overall, our Optoelectronics business is very well positioned for the second half of 2007.

Now turning to the balance sheet and cash flow, during the second quarter of 2007, we had GAAP operating cash flow of $69.7 million, compared to $53.2 million in the second quarter of 2006, driven by the growth in profitability and flat working capital. As Greg mentioned, our continued generation of strong cash flow coupled with a strong balance sheet allowed to us make further progress on multiple initiatives.

In addition to the acquisitions we increased our rate of investment, spending $16 million in capital expenditures, up from $12.2 million last year, and we increased R&D spending by 9% over the same period in '06. In addition, we used $87 million to repurchase 3.5 million shares within the quarter. We finished the quarter with total cash of $150 million and net debt -- which we define as total cash less short and long-term debt -- of approximately $85 million, leaving us very well positioned to continue to allocate capital to growth opportunities and share repurchases.

We expect revenue growth to be in the low double digits for the third quarter, with foreign exchange contributing approximately 250 basis points and acquisitions another 250 basis points. For the third quarter 2007, we are forecasting GAAP earnings per share from continuing operations of between $0.24 and $0.26, with the impact of stock option expensing expected to be a $0.01 and the impact of amortization $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 $0.31 and $0.33 for the third quarter of 2007.

For the full year 2007, from a revenue perspective, we are forecasting growth to be in the low double digits, which is at the high end of our initial guidance which we established at the beginning of the year. The overall impact of FX is expected to be a couple hundred basis points and acquisitions another couple hundred basis points. Our full year adjusted EPS estimate remains unchanged and at an increase in the low double digits to mid-teens.

The estimated impact of intangible amortization is forecasted to be $0.23 cents per share for the full year, while stock option expense will have an impact of $0.05 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.

(OPERATOR INSTRUCTIONS) Your first question comes from the lines of Paul Knight with Thomas Weisel Partners.

Hi, guys. Congratulations on the quarter.

Thanks.

Looking at the back half of the year, you obviously had one of your best quarters in years on organic growth. But talking about the back half of the year, where are you with organic, as you see the slow summer months here in Q3 and the rest of the year happen?

So, Paul, this is Jeff. I think we have got pretty good momentum in the business. I think our guidance for the third quarter was kind of low double digit growth with FX and acquisitions each costing -- or each benefiting by a couple hundred basis points. So I think you can kind of extrapolate off that into the fourth quarter as well. I think we see continued strength.

And, Greg, we have had much higher margins at PerkinElmer in the past. Where are we with that trend?

When we look at the markets where we are, Paul, we feel pretty good about our ability to increase the margins as the businesses progress. We have been in a fairly heavy investment mode over the past year and a half, particularly, and -- but we expect that we will meet our margin targets for this year, and that going forward, as we continue to build these franchises, that the investment -- I will call it the rate of growth in investment will slow down significantly.

We will keep the investments reasonably high. But the rate of growth will slow down, because we want to keep driving the organic growth and that will allow the margin expansion to take place with both volume, productivity, mix and pricing leverage.

What was your best business in the quarter, Greg?

Well, from a growth rate standpoint, it's really our diagnostics businesses. So both med imaging and genetic screening have been the best growers for a consistent period of time.

And where are the state programs in their rollout of the new diagnostic test programs? Are we almost done with those awards or half or where do you think we are?

So, Paul, this is Rob. As I mentioned the March of dimes just has come out and said we have got 88% of the babies now getting 21 tests and above. So I would say the rollout is fairly far along. Having said that, though, we continue to look for opportunities and we see opportunities to increase testings beyond the standard 29. We think we will see something going here to sort of maybe close to the mid to high 40s.

The other area that's actually happening that is starting to generate a fair amount of growth in the neonatal area is, as you know, as these states have adopted the tandem mass spec and they have gone from, let's say, 5 tests or 20 to 25, the number of data points that they collect does not go up 5x, it goes up 500x. Because as you may know when you do tests on a mass spec, you get many multiple data points for each test.

And so what we are finding now, or at least what the states are finding, is a tremendous need to adopt an informatics package. And we have the leading package with Specimen Gate. So what we are finding is while there was, let's say over the last year or two, a ramp-up in the adoption of the instruments and the reagents, we are now seeing sort of a next wave of adoption of the informatics package.

And of course when you do that you get the additional licenses and then there's upgrades and there's modules and there's support and all that other kind of stuff. So we see continued good legs here in the U.S., irrespective of the fact that the states are starting to build out from the standpoint of the recommended panel.

Okay.

Of course, Paul, we continue to see increasing adoption overseas. I think, you know, Jeff mentioned Russia and Saudi Arabia, in the Asia Pacific region. And so I would just say around the world we continue to see growing interest and adoption rates.

Thank you very much.

You're welcome.

Your next question comes from the line of Derik De Bruin with UBS. Please proceed.

Hi. Good afternoon.

Hi, Derik.

I just want to follow up a little bit on one of Paul's questions. On the last call, there were still a lot of start-up costs and things that were going on with gross margins, services start-up, and (inaudible) you've got the -- in this quarter you have the cell phone flash start-up cost there.

I guess, are these costs going to remain high the rest of the year? Are we going to see some improvements in gross margin? I guess I'm trying to [pick] out the fact that you had an outstanding quarter, and we are still both scratching our heads here a little bit, looking for the leverage in the business.

Yes, so, Derik, this is Jeff. As I mentioned in the comments, but let me go over it again, the impact of, let's say, some pretty accelerated investment to get our mobile phone program up off the ground hit this quarter, which we don't expect to recur. We also some kind of legacy issues with investments and lower margin contracts that we are working through. Both of those events combined weighed on the margins by roughly 100 basis points. We were down 40, we would have been up about 60.

Going forward, the mobile phone investment has been made and we expect that program to actually be very accretive in the back half, and that was in the plan, so that's good news. And the service large programs, we are working through those. And so those will be less of an issue in the third quarter and hopefully be in pretty good shape in the fourth quarter.

So if you kind of remove the majority of that impact, you'd see margins expanding, gross margins expanding, which is going to kind of carry the operating margins. And certainly, the fourth quarter is always our largest month, our largest quarter, excuse me, from a volume perspective, when we get the most drop-through. So I think you will see a lot more leverage as you make your way through the back half of the year.

That's helpful, the clarity. So I guess when you start -- I know it's too early to start looking into 2008, but would you certainly expect similar levels of start-up costs next year or would -- assuming that you have even similar types of organic growth, would you expect that to fall through next year?

It is too early. I guess I would kind of point back to our medium term outlooks that we have shared with people, to be clear. And I think over the medium term, certainly we feel a 50 to 70 basis points expansion, the business is definitely capable of that.

Okay. Thanks.

Yes. You're welcome.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Quintin Lai with Robert W Baird.

Congratulations on a nice quarter.

Thanks, Quintin.

As we are looking at this outsourcing trend that's going on, it's been very strong for you. It seems to us that you are taking market share in this area. How early are we? I know that you kind of mentioned about the top 15 -- 15 of the top 20, but of those top 15, have they just completely moved over, or are they still gradually moving over? And how long could this trend continue through?

So Quintin, it's Greg. I would say the outsourcing trend is still -- on the service side, is still fairly early. And so on a number of accounts, you typically start with one location and then you have the ability to roll it out to other locations, as it gets established and proves itself through there. I think that's one trend.

I think the other trend we see is an expansion of the range of services that you can provide. So, for example, whether it's lab design, lab moves, more validation, multi-vendor validation, you can continue to expand the breadth of service capabilities within it.

So I think it's still fairly early days, and that is within the pharma space. Then outside the pharma space, it's even earlier days. So I think this is kind of at the beginning of where we see this trend going.

And then with respect to some of these servicing contracts, Jeff, on an accounting basis, do you amortize the revenue over -- evenly over the year but you take the costs as they come in, so that that gives you a bit of a seasonality, which may cause costs to be high in the first quarter, when a lot of maintenance is done?

Yes, there is definitely an element of that to it. Each contract is slightly different, Quintin, but many of the contracts have that element.

The other issue with the contracts is, as we ramp up some of these programs, we have got to put a little more investment in the front end around the administrative side. And that's where we spent a little bit more earlier on the year and then as business grows, we will cover that more easily. So it's a little bit of both.

Super.

And so Quintin, I would add one other thing to that, that also drives the profitability on the service contracts. A lot of times when we go in and, as you know, we are taking over an entire lab, there will be multi vendors. And in some cases we can go in and do the repair work for that, let's say other party right away; in some cases we have to migrate that over.

So in a lot of cases, what you are going in and you are taking over revenue where it may just be a pass through; let's say a third of it is a pass through initially, so the margins are relatively low. Over time, as you do more of that, as you maintain more of that yourself, your margins go up.

And so that's the other aspect of the service. Initially when you go in, there's some relatively low margins. And as you migrate that more to PerkinElmer work, as compared to contract work, that also drives the margins up.

Oh. That's great color. Thank you very much for that. With respect to the environmental, Jeff, when you said strong double digit, what if you were to X out some of the effects of acquisitions?

It would still be strong double digits.

Okay. Great. Congratulations, then; and congratulations to Rob and Greg on your new positions.

Yes, thanks, Quintin.

Your next question comes from the line of John Sullivan with Leerink Swann. Please proceed.

Hey, guys, good afternoon. Congratulations on a nice quarter. A couple of quick questions just to sort of go over a couple of issues that have presented themselves in the past in periods of strong growth in your business. Can we just chat about the digital flat panel business and capacity and just kind of how you feel as that business continues to grow double digits for you?

Yes. So the digital flat panel business is still a capacity constrained business for us. We have very strong demand in the business. We see that continuing on. We have been investing aggressively. Both Jeff and I mentioned the step up in the CapEx spending that has been going on.

We are in the process of doubling the capacity of the fabrication facility which is in Santa Clara, California, and that physically happens, if you will, kind of beginning of '08. But then you have got a tool qualification period that goes on; and you can think about a tool taking kind of 18 months from beginning to final qualification. And so that's a process that continues on.

So I guess the way to stand back from it is to say that our capacity continues to increase because of this investment and prior investments, that our capacity literally continues to increase each quarter, as we are able to qualify different tools or additional tools that come on space. So net-net when you stand back, we think this is a 15 to 20% grower for us over the near term time horizon, given the demand curve and what's underway in terms of capacity.

(multiple speakers) from a technology standpoint, the product continues to be very well accepted. It's really enabling new capabilities, whether you are in the diagnostic imaging side, or whether you are on the therapeutic imaging side, or whether you are into some of the nonmedical, some of the industrial, nondestructive testing side which is still very early days in that area.

So I think the technology continues to gain acceptance, and as the volumes grow in the industry, and the price performance ratios improve, the number of applications continues to grow. So we have a -- we are investing in the business because we believe we will get a good return out of this over a long period of time because of the growth and the value that it delivers to the customer.

Very helpful. Thanks. If I can just stay for one more second on the theme of just checking regarding capability in some of the fast growing businesses you talk about. It feels like environmental and forensic and chemical are also growing well for you. About a year ago, you guys launched this Clarus 600 series GC gas chromatography instrument. I was just wondering, are you -- are there any challenges meeting demand with the environmental customer base going so quickly for those type of products? Any challenges regarding meeting demand for those products?

No, John. This is Rob. I think we are in pretty good shape relative from a capacity standpoint. So I think we are in good shape. That production has ramped up nicely. And so I don't see any constraints on us from that perspective. And that product does very well in the market.

And, as I mentioned, we also introduced the 560D, which has a lot of the excellent sensitivity and the ease-of-use of the 600 but in a little lower cost model particularly geared at the environmental area. So we still have significant expectations for that product line.

Sure. Understood. Thanks so much. I will jump back in the queue.

Your next question comes from the line of Vito Menza with Sandler Capital. Please proceed.

Hi, guys. Great organic growth. Just two bookkeeping questions and then one quick qualitative one. On the bookkeeping stuff, just the actual share count at the end of the quarter.

We had about 118 million shares outstanding at the end of the quarter.

Okay, great. So you definitely stepped up the buyback. And the next one is just -- pardon my ignorance on this, the other expense line on the GAAP P&L, you said $1.1 million. What exactly is that?

That's a combination of foreign exchange and a host of other smaller items, but predominantly foreign exchange.

Got it. And then last one, you know, the enviro business, I think if I recall you described it previously as the market growing in kind of the high single digit range. Would you say now that you are seeing double single digits there? Is there an acceleration in that business? And if so, is it driven by China? Is it driven by other emerging markets? What do you see there?

I think your question was on the environmental business?

Yes, is there an acceleration in the actual growth rate of the market?

I would say there, as I mentioned, we are seeing some very positive trends here, whether it's the food safety, whether it's the environmental and a good underlying demand from the industrial side. So I'd say we are seeing increasing market. Having said that, there was some spillover from Q1.

So the strong growth we saw in Q2, I would say, was partly market, partly timing from some spillover from Q1; and I think quite frankly we are executing a little bit better. So I would say a combination of all three of those.

Okay, great. Thanks, guys. Nice quarter.

Your next question is a follow-up question from the line of John Sullivan with Leerink Swann. Please proceed.

Oh, hey, guys. Thanks so much for taking one more. I'm just wondering about a field that you guys have talked about in the past as having a pretty good growth profile for you, this cellular imaging platform, products like CellLux, and LumiLux and UltraVIEW. Can you just comment on whether, in a world where maybe drug companies are spending a little bit more in development and maybe not spending as aggressively on discovery, are you still having good uptake of the cellular analysis platforms?

Yes, John, this is Rob. One of the things we do think is happening within the pharma is they are focused more on the high content area, because they can get more information there. So instead of getting single data points, as they did in the high-throughput screening, they're getting multiple data points. And that's helping them deselect some compounds out, either because they are seeing some things from an ADME/tox perspective.

So we do think increasingly the high content area will be an area of some focus from the pharmas. Having said that, we are seeing good growth off of sort of a relatively low base for us right now. But I think directionally, it does seem like we'd have pretty good demand from the customer perspective.

Is stem cell analysis and research an angle on this part of the business or not so much?

We are not seeing a lot of that right now, but potentially, I think, in the future, it's an opportunity for us.

All right. Thank you so much again.

You're welcome.

Ladies and gentlemen, at this time, there are no more questions. I would now like to turn the call over to Mr. Summe for closing remarks.

Thank you, operator. Thanks, everyone, for your participation today and your continuing interest in PerkinElmer. We had a good second quarter and believe we are well positioned to continue that momentum throughout the remainder of 2007. This call is adjourned. Have a great evening. Thank you again.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.