Revvity Inc (RVTY) 2007 Q4 法說會逐字稿

Good afternoon, and welcome to the fourth quarter 2007 PerkinElmer earnings conference call. My name is Katie, and I'll be your coordinator for today. At this time, all participant will be in a listen-only mode. After the speaker remarks, you will be invited to participate in the question-and-answer session. I would like to now turn the call over to your host for today, Mr. Mike Lawless, Vice-President of Investor Relations. Please proceed.

Thank you, Katie. Good afternoon and welcome to the PerkinElmer fourth quarter 2007 earnings conference call. If you've not received a copy of our earnings press release, you may get one from the Investors section of our Web site at www. PerkinElmer.com. or from our toll-free investor hotline at 1-877-PKI-NYSE. Please note that this call is being Web cast live and will be archived on our Web site until February 24, 2007 (sic).

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 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 that 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, Mike. Good afternoon, everyone, and thank you for joining us on today's call to discuss our fourth quarter 2007 results. Joining me on the call are Rob Friel, our President and CEO-Elect, and Jeff Capello, our Chief Financial Officer. I will begin by reviewing the major highlights of the quarter. Jeff will provide more detail on the financial results, and Rob will comment on the outlook for 2008. And after that, the three of us will be available to answer questions and then we will conclude the call.

The fourth quarter was excellent and finishes off a very successful 2007. Furthermore, we believe that we entered 2008 with very good momentum. In the fourth quarter, our revenue increased 20%, with revenue growth of 19% at our Life and Analytical Sciences, and 22% in Optoelectronics. Our revenue growth in the quarter was led by medical imaging, genetic screening, specialty lighting, service and analytical sciences, all with double digit growth. At 10%, this is the highest organic growth since fourth quarter of 2000. Our adjusted earnings per share were $0.45 cents, which was above our previously forecasted range and consensus expectations. Cash flow from continuing operations was $97 million, up 15% from last year. And these strong results conclude an excellent year of double-digit growth for the company with 2007 revenue of 16% to nearly $1.8 billion, adjusted cash EPS of $1.30, an increase of 13% even with including the dilution from ViaCell, and free cash flow or cash flow from operations less capital expenditures for the year at approximately $160 million. Overall, we are very pleased with the growth momentum of our business and we look forward to a strong 2008.

Let me just turn to a couple of business highlights. First, we completed our acquisition of ViaCell, a leader in the collection, processing and preservation of stem cells from umbilical cord blood for future medical use. This acquisition provides us important new capabilities for genetic screening business, as the therapeutic value of stem cells grows every day. Additionally, it significantly expands our sales and marketing force to OB-GYN professionals and provides us a direct marketing channel to prospective parents. The integration is going well. We are pleased with our progress. In late December we also announced an agreement to acquire the neonatal screening laboratory at Pediatrics Medical. This transaction, which is pending, will provide us complimentary capabilities to better serve our neonatal customers, the state reference labs. Presently, we supply instruments, reagents, software and protocols for neonatal screening. And with the acquisition of Pediatrics, or from Pediatrics, we would add laboratory capabilities, which we expect will provide additional benefits to our customers, including our ability to introduce new screening tests more quickly, offer supplemental tests in addition to state-mandated ones and provide back-up testing and supplemental support services.

During the fourth quarter in response to the increased demand for measurement in air and water quality, food and product safety and biofuel development, our Analytical Sciences business launched the ecoanalytics initiative. We have had excellent market response and expect to build on this progress through continued new product introductions and expansion of more application-based solutions such at melamine, protection and food stock. Our Optoelectronics business had a very good quarter, good acceleration and revenue growth, operating profit and cash flow. In the fourth quarter, our growth was led by a record number of shipments in flat-panel digital x-ray detectors, demand from both diagnostic and therapeutic customers remain strong. And with the expansion of the footprint of our 80,000 square foot panel fabrication facility now complete, we are installing production tools which will serve to eventually double the production capacity of this facility. We expect that capacity to come online throughout 2008 and 2009.

With this additional capacity, we have the opportunity to better serve our existing customers, as well as pursue new applications in veterinary, dental and nondestructive testing. Our Specialty Lighting business saw excellent revenue growth driven by continued adoption of our Xenon Flash modules for mobile camera phones -- mobile phone cameras. Four of the top five mobile phone camera manufacturers are now integrating our flash technology into their new generation camera phones, which we expect will translate into more growth in 2008. We believe we are in the early stages of adoption by the camera phone market of Xenon Flash, and that the opportunity for us in the marketplace would be significant. We also generate a good growth in the digital still camera market, where we have had several significant wins with major OEMs.

Finally, as we announced yesterday, the Board of Directors has elected my long-time friend and colleague Rob Friel as President and Chief Executive Officer effective February 1. For the past decade, it has been a privilege to lead PerkinElmer and I'm very proud of our track record over that time. In my continuing role as Executive Chairman, I look forward to working with the leadership team over the next year as the company continues its progress. I have great confidence in Rob and the leadership team, and I am certain that PerkinElmer's best days remain ahead.

I'll now turn the call over to Jeff to provide more detail on the financial results.

Thank you, Greg, and good afternoon. This afternoon I will provide some details on our revenue, costs and cash flow for the fourth quarter 2007. Then I will provide guidance on 2008, including full year in Q1 '08 guidance before passing over to Rob Friel for some comments on the health of our businesses. Before I get into specifics, I want to clarify whenever I talk about a particular measure being up or down, I am referring to an increase or decrease in that measure during the fourth quarter of 2007 compared to the fourth quarter of 2006. And to the extent that I use any non-GAAP measures, those have been reconciled to the comparable GAAP measures in the appendix to the press release on our Web site.

Turning first to revenue, we finished the fourth quarter of 2007 with sales of $511 million, up 20% compared to $427 million in the fourth quarter of 2006. Foreign exchange and acquisitions each increased sales by approximately 500 basis points. By segment, revenue growth was 19% in LAS and 22% in Optoelectronics. LAS revenue growth was increased by 700 basis points from acquisitions and approximately 500 basis points from foreign exchange. Foreign exchange increased Optoelectronics sales growth by 300 basis points. The remaining revenue comparisons are presented on an reported basis including the impact of foreign exchange and acquisitions.

Geographically, revenue increased in the strong double digits across all regions with 41% of revenue being in the Americas, 38% in Europe, and the remaining 21% in Asia. Gross margins for the fourth quarter of 2007 were 41.8%, roughly flat compared to the fourth quarter of 2006. Adjusted for the impact of stock option and amortization expenses and purchase accounting adjustments related to ViaCell gross margins were also roughly flat year over year. Favorable growth margins from the ViaCell business, volume leverage from our medical imaging business and productivity initiatives were offset by inflation and by growth in our service and lighting businesses which have lower gross margins, but also lower SG&A expense. R&D expenses increased 6% to $28.8 million in the fourth quarter of 2007 from $27.1million in the fourth quarter of 2006. Adjusting for the impact of stock option expensing and amortization, R&D expense as a percentage of sales decreased by 70 basis points due to the favorable impact of sales growth and the high level of R&D investments in the fourth quarter of 2006, when we made a conscious decision to increase our R&D funding. Going forward we expect to increase our R&D spending roughly in line with our growth and sales.

General administrative expenses were 24.8% in the fourth quarter of 2007, up 27% from the fourth quarter of 2006. Adjusted for the impact of stock options, legal settlements and amortization expense, SG&A increased 90 basis points. The increase in SG&A was primarily driven by fixed cost leverage on higher sales and lower SG&A costs of service and lighting, being more than offset by the impact of ViaCell acquisition which carries a relatively high SG&A expense level. During the quarter, we reported a $6.8 million restructuring charge, principally related to redirecting our R&D efforts towards higher growth opportunities and addressing capacity issues in certain product lines. GAAP operating income for the fourth quarter of 2007 was $51.1 million compared to $52.2 million in the fourth quarter of 2006. Excluding intangibles, amortizations, stock option expense, purchase accounting adjustments, legal settlements and restructuring charges, adjusted operating income increased 18% to $75.5 million in Q4 '07 from $64 million in Q4 '06, despite increased investments in ViaCell, other acquisitions, product line rationalizations, and role initiatives, driven primarily by strong revenue growth. Given the strong growth in revenues and investments made in the growth platforms, including acquisitions in 2007, we are very well-positioned to drive increased profitability in 2008.

Looking at expenses below operating income, interest expense net of interest income in Q4 '07 was $4.1million as compared to net interest expense of $700,000 in Q4 '06 due to the increase in debt over the last 12 months to fund our acquisitions and share repurchase initiatives. We also had roughly $1.3 million of other expense from the impact of foreign exchange in the quarter. In the fourth quarter of 2007, we had tax income of $8.9 million, driven by the favorable settlement of a tax issue in Europe which generated a benefit of $18.6 million. Without a favorable tax settlement, the tax rate for the quarter would have been approximately 100 basis points below our Q4 '06 forecast of 24.5% due to income being earned in lower tax jurisdictions. We expect our tax rate to be approximately 24.5% or lower during 2008, depending on the distribution of actual income by tax restrictions and other items. Net income from continuing operations was $54.6 million in Q4 '07, up from $41.1million in Q4 '06. [Presently] we have a net loss form discontinued operations of $915,000 from the operation of the therapeutic programs in the [inaudible].We are in the process of running a process to divest these programs and expect to conclude this process in the next six months. In addition we incurred a net loss of $1.1million associated with a former divested business.

GAAP EPS from continuing operations increased 39% to $0.46 in Q4 '07 and $0.33 in Q4 '06. Excluding intangibles, amortization, stock option expense, legal settlements, purchase accounting adjustments, restructuring and a favorable tax audit settlement, adjusted EPS was $0.45 in Q4 '07, an increase of 15% over $0.39 in Q4 of '06, exceeding both the first call consensus estimate, adjustment of our stock option expense and our forecasted range of $0.42 to $0.44. With an average diluted shares outstanding for the quarter of 119 million shares, reflecting the impact of our year-to-date repurchases, including the million shares we repurchased this quarter, we currently have approximately 1.9 million shares remaining under the 10 million share repurchase program, which we expect to begin to execute in 2008.

Turning our segment results, I will briefly describe our Q4 performance. In LAS, revenue for the quarter was $382.1million, up 19% over the fourth quarter of 2006. On a GAAP basis, LAS operating profits for the fourth quarter of 2007 was $40 million, compared to $40.9 million for the fourth quarter of 2006. Excluding the amortization intangibles, stock option expenses, purchase accounting adjustments related to ViaCell, legal settlements and restructuring charges, LAS Q4 '07 operating profit increased 17% to $59.9 million from $51.3 million despite the impact of integrating ViaCell, continuing to reposition our product lines. Given the strong growth and revenues investments made in growth platforms including our acquisitions in 2007, we are very well-positioned to drive increased profitability in this business in 2008.

In generic screening which was about 16% of LAS revenue in the quarter, revenue increased in the strong double digits. We continued to see excellent expansion in neonatal screening which grew strong double digits driven by further penetration of our instruments into Mexico and China, as well as increasing new [light] penetration such as IRT in the United States. The ViaCell business grew in the strong double digits driven by increased adoption of cord blood storage. Prenatal screening also grew in double digits during the current quarter compared to Q4 '06, driven by both strong double digit growth in [NTD] and increased adoption of second trimester risk assessment products in both China and across Europe. Service, which represented about 23% of our LAS revenue in Q4 '07 also grew in the strong double digits. We saw a good growth in one source business with our new business in both biopharm and consumer products segments. Within the quarter, we also had a strong growth in our lab relocation service validating our service strategy of increasing offerings and value-added services to make our customers more productive.

In the Analytical Sciences product lines, which represented about 37% of our LAS revenue in the quarter, revenue increased in the strong double digits driven by very strong performance in our ICP, GC and IR product lines. Strong demand in ICP is being driven by environmental applications for clean air, clean water, the development of new fuel sources and consumer product safety, where ICP is the technology of choice and we have a clear leading technology position. Strength in GC is being driven by the expansion of our Clarus product line which now includes multiple price and performance points and is being very well received in the marketplace. In addition, IR had a very strong quarter with growth in the QA/QC areas of both pharma, food industries, forensics and chemical area.

Drug discovery sales, which represented 23% of LAS revenue in the quarter increased in the double digits compared to the same period in 2006. Within drug discovery, certain of our reagent businesses showed very strong improvement in the year-over-year revenue growth versus Q4 '06, driven by new product introductions. We saw strong growth in our reagent product lines, driven by strong acceptance of our new product introductions in the GPCR, kinase, and biomarket drug target classes, with both biochemical and cellular-based assays. In addition, we began to see some growth in our [add] reagent product lines from our recent agreement to assume supply of short live reagents to competitors' customers. Offsetting strong performance reagents was some weakness in instrument volume, driven principally by order lumpiness and the timing of new product introductions. In Optoelectronics, revenue for the quarter was $129.4 million, up 22% compared to the fourth quarter of 2006, led by our imaging and lighting businesses which both grew in strong double digits.

Optoelectronics GAAP operating profit for the quarter of 2007 was $22.6 million, compared to $19.8 million in the fourth quarter of '06. Excluding intangibles amortization, stock option expense and reconstructuring charges, operating profit increased 28% to $26.2 million in Q4 '07 from $20.4 million in Q4 '07 (sic), driven by the combination of strong volume and productivity gains. Within Optoelectronics, medical imaging revenue which represents 28% of Optoelectronics revenue grew strong double digits during the quarter, driven principally by strong demand in operation performance in our amorphous digital x-ray panels. We had a very strong quarter operationally in which we shipped a record number of panels for the facility. In addition, we have now received the majority of the tools required for the fab expansion, which will begin to add productive capacity throughout 2008, which will be very helpful in addressing current unmet customer needs.

Interest revenue, which represents 31% of Optoelectronics revenue increased in the low single digits in the quarter. Revenue growth and commercial sensors, photo diodes, [sturdy] screening, [files] and [airconditioning] were partially offset by contraction military sensors as we continue to transition to new defense programs. Lighting, which represents 42% of Optoelectronics revenue, increased in the strong double digits compared to Q4 of last year, driven primarily by the shipments of our mobile phone flash modules and further penetration into the digital camera market. We are continuing to see strong interest in both the camera and the mobile phone market, validating the strength of our leading Xenon flash technology.

Now turning to the balance sheet and cash flow, during the fourth quarter of 2007, we had GAAP operating cash flow from continuing operations of $97 million, which is an increase of 15% over the $84 million in Q4 '06. Our focus on working capital continues to pay dividends as we achieve working capital terms of 5.8 times in the fourth quarter. In particular, we made strong progress in inventory, where we reduced days of inventory by three days year-over-year. Our continued generation of strong cash flow, coupled with a solid balance sheet, allowed us to make further progress on multiple initiatives. As noted earlier in the quarter, we closed on our acquisition of ViaCell for a net purchase price of approximately $264 million. We continued our investments in the business, spending $9 million in capital expenditures, and $28.8 million on R&D. We finished the quarter with total cash of $203 million in net debt, which we defined as short and long-term debt and of cash of $313 million. We currently have a bridge financing facility, which we intend to fund with longer-dated piece of capital. The combination of very strong cash flow generation and moderate leverage leaves us very well-positioned for 2008 and beyond.

Now, turning to next year, I will briefly discuss 2008 guidance. We expect to be able to build off the strong momentum achieved throughout 2007 as we look forward to 2008. Revenue growth is expected to be in the low double digits to mid teens, driven by strength in our end markets, new product and business development initiatives. We expect total cash EPS growth in the low double digits to mid teens for the year. Free cash flow is expected to be equal to or greater than cash net income. For the first quarter of 2008, we expect similar operating results from a revenue and operating profit perspective, which would translate into expected EPS from an adjusted cash EPS of $0.26 to $0.27 or $0.18 to $0.20 cents on a GAAP basis. I would now like to turn the call over to Rob Friel for some comments on the health of our businesses going forward.

Thank you, Jeff.

As we enter 2008, our businesses have good positive momentum and are well positioned to continue to deliver the strong growth on the top line and the bottom line that Jeff just mentioned. The strength of our franchises and our participation in three key market trends should continue to create opportunities for us to grow almost irrespective of the overall rate of global GDP growth. These trends are the rising costs of healthcare costs, requiring better predictive diagnostics and more effective therapeutics, the pressure for more testing of food, consumer products and our environment due to increasing health concerns, and finally, the rapid adoption of flash modules into camera phones. The fourth quarter was another strong quarter for genetic screening, as we continue to experience very good market conditions across virtually every segment of the business, including newborn screening, prenatal and maternal health, molecular diagnostics and now cord blood. We enter 2008 as a leader in reproductive health, with a significantly expanded market reach, scale and breadth. This year we expect to continue growing in the mid to high teens organically, by leveraging an expanded channel into the OB-GYN professionals from ViaCell in the prenatal screening market. In the neonatal market, we are excited about the potential to combine metabolic screening lab from Pediatrics Medical with our existing global capabilities, as well as our new direct marketing channel into expecting parents. In the maternal screening area, we are growing nicely outside the U.S., and continue to work on our PMA for the U.S. market, while across all our products, the international markets still remain underpenetrated and represent great opportunities for us.

Our other diagnostic business is medical imaging, which should also grow in the mid to high teens this year as the end market continues to experience strong growth due to the conversion from film to digital images. In drug discovery, we believe the market will continue to be challenging this year, with large pharma again being under more cost pressures than the biotech firms or the academic labs. However, despite this, there will be several areas of growth for us due to investments we have made previously in new products and acquisitions. These should allow the businesses to grow mid single digits this year. These areas include cell-based assays, particularly our assay reagents focused on kinase and GPCR screening, our assay development service, custom sythesis of radio-labeled compounds for use in [admi] tox, and our cellular imaging for high content screening.

Turning to Analytical Sciences, business growth should continue to be fueled by both increased customer requirements and new regulations in consumer, product and food-safety testing, environmental monitoring, and alternative energy needs. 70% of our revenue in this business is derived from end markets that are impacted by this requirement to increase monitoring. In addition, we continue to strengthen the portfolio with new product introductions, and this business benefits from the continued industrialization of the developing world as one-third of the revenue comes from outside the U.S. and Europe. Our laboratory service business should benefit from an environment where customers facing increasing cost pressures and need to increase scientific output with less staff. As a consolidated service provider, we help our customers, which include biopharma and increasingly food and consumer product companies, to better the maintaining cost and improve asset utilization and up-time and offering increasingly more valuable in tough economic conditions. As Greg mentioned, our photonics business is experiencing excellent demand for its flash modules. Our belief is that the trend toward the use of flash and camera phones and the overall demand for these products will not be significantly impacted if we see a slowing global economic growth. Consequently, we are quite bullish on this business for the foreseeable future.

In summary, we have a lot of positive things going on at PerkinElmer, and believe we are positioned well to deliver strong financial results this year. Our strategy this year will be to leverage our strong market positions and capabilities on these favorable end-market trends, while continuing to evolve the portfolio to the most attractive market segments through both internal growth and business development activities. We will continue to migrate our offerings from standardized products and services to much more customized applications and solutions, which better address the needs of our customers. In the past few quarters, we have made great strides to accelerate our top line growth, and I am confident these trends are sustainable.

I am extremely pleased to have the opportunity to lead PerkinElmer in its next phase of growth. It has been both a great experience and pleasure working with Greg for the past nine years to transform PerkinElmer into what it is today. We are in the best competitive shape we have been in a long time. We have a great team in place, and I believe the future is very bright.

Now I'd like to open the call for your questions.

(OPERATOR INSTRUCTIONS) And the first question from the line of Ross Muken from Deutsche Bank. Please proceed.

Hi, guys.

Hi, Ross.

Congratulations. Great quarter and congratulations, Rob.

Thank you.

Could you give a little more color specifically on the health sciences businesses on more of the biopharma assets and some of the -- or life science assets, sort of what you saw on a global basis in terms of demand by geography? And just a little more detail, sort of what you are seeing in each of the customers, the key customer segments in those geographies?

Okay. Let me start off with that. So I would say from a product perspective, we're clearing clearly seeing more growth on the reagent side than the instrument side and I think this is a function of what you're seeing in the press with regard to pressure on budgets. And I think it is hitting particularly the capital expenditure side of things. I would say it's clearly more -- that problem is clearly more attuned on the pharmaceutical side than it is on the biotech or the academic side. So our approach is to continue to drive new products, particularly into the reagent area. And I mentioned a couple of those areas, particularly, are cell based assays around [time] and GPR screening. We are also seeing a fair amount of interest in this recently-introduced product around assay development services, as a number of the large pharmas are talking about outsourcing some aspect of that. I would say geographically, we saw much stronger growth with Europe than in America and Asia, which is a significant piece of business for us. It was also up but not -- again, it's not a big portion of the business for us.

In terms of the key customer segments, I mean, what was driving the European out performance? Was it a big pharma-related push there? Was it environmental?

Well, so I was just talking about the drug discovery piece.

Okay.

So I would say it was driven largely by big pharma. But again, I think it's increasingly harder to sort of characterize big pharma, because it's almost customer by customer. So we'll see certain customers increasing their expenditures quite significantly, where other individual pharmaceutical companies will be cutting back fairly severely. So it just so worked out for our mix in the fourth quarter, Europe was much stronger than the U.S.

And in terms of the emerging markets.

I'm sorry?

The emerging markets, as China, India, et cetera?

Yes, I think those continue to grow in sort of the 20% plus area. But again for us, it is a relatively low base in drug discovery. Now, if we move over to the analytical sciences area, I think your point before was valid in that that's being driven by a lot by the environmental, the food, and the consumer products monitor -- additional monitoring that is being -- seems to be required. And I would say in those businesses, we actually saw higher growth in America than we did in Europe and we also saw strong growth in the pack ramp.

Okay. And you know, you guys have done a real nice job of accelerating revenue growth via a lot of smaller tuck-in acquisitions. As we turn to 2008, what should we expect from sort of a capital deployment perspective? More small deals? Any sort of preference towards doing possibly a larger deal? And how do you think about where you are from a leverage perspective?

So I would say, as you mentioned, I think we have been pretty happy with the progress we've made on these sort of tuck-ins, which you know was adding products, services and technology. So I would expect us to be -- to continue to use that model, less inclined to do larger deals. I think from a leverage perspective, I think as Jeff mentioned, we are probably around one times EBITDA now. I think we'd probably be comfortable up to probably a little under two times, but I don't that know we would go significantly beyond that.

Okay.

The only thing I'd add to that, Ross, would be as I mentioned earlier, we have about 1.9 million shares left with our previously approved program. I would look to kind of get that done in '08 and probably at a minimum, keep the share count flat to buying any delusion of the impact of employee stock options and employee stock purchase plans traditionally is in the 2 to 2.5 million shares per year. In the minimum, we'll do that and we'll look opportunistically at other share repurchase programs.

Jeff, just quickly, there was a little bit of disruption on the call. From a housekeeping perspective, could you just go through the tax rate again for the quart?

Sure, we forecasted overall 24.5% rate for the year. We came in at about 100 basis points below that.

Right. But specifically for the quarter, was there any comment on the tax for the quarter?

Yes. I'm sorry. For the quarter, we also kind of foreshadowed 24.5% and came in 100 basis points below that.

Okay. That was on the one timers?

No. It's just on the distribution of income. Okay. We tend to earn more income in certain places where we have favorable tax situations, we'll end up with a better rate for the quarter.

Okay. Perfect. Thanks, guys. Congratulations again.

Thanks.

Your next question Quintin Lai from Robert W. Baird. Please proceed.

Good afternoon. Congratulations on a nice quarter on your end.

Thanks, Quin.

As you look at the rest of your industrial pieces not exposed, not part of the regulations or regulatory environment, how cyclical do you see that part of the business? And how much visibility do you have right now as you look out into '08 for those lines?

I guess we talk really when you say non-regulatory, you are talking of sort of non-diagnostic based?

When you say that 70% of analytical services is due to some type of regulation and monitoring, I assume that the 30% might be tied to maybe some commodity.

Right. Okay. I understand the question now. So I would say our insight into that is probably about one quarter out. And while I would say it will be impacted by an economic slow down, it's fairly diverse from sort of industry to industry, so we're not really tied to any one specific industry. But I think there could be some variability in that and it will be impacted. But we are -- generally, our bookings are probably in the next quarter.

And Quintin, I would say that is also reasonably diversified across geography. So, in that business we are about a third a third a third -- US, Europe, rest of the world. So, it sort of depends where the economic effect is.

All right. So then what you are saying is the vast majority, I guess of the services, the analytical science side then isn't really prone to that cyclicality? Well, potential cyclicality.

Right. That's because of the 70% that's tied to the other areas.

Excellent. And then with respect to your photonics business, especially your lighting, as all these cell phones start to adopt Xenon modules, could you talk a little bit about your capacity and your potential to grow that business line?

Yes. Quentin, it's Greg. So capacity is relatively easy for us to ramp up. Just to give you some sense, we have been in the flashlighting business for decades. And you know, if you go become five years ago, just as short as five years ago, there was a very high volume that was placed through film-based single use cameras. So what happened with this shift from film to digital, of course, we had a number of years of very tough sort of comps as we went through that cycle with the film dropping down. But we had a fair amount of capacity on the lamp side and then go from lamps to modules, really think about that as leveraging into the EMS industry. So the big contract assemblers are the ones that sort of help put it into the module format. So I think the capacity flexs pretty well.

My last question. I'll jump back in the queue. As you look at your diagnostic franchise, again it is just going so well. You are doing well in the neonatal and the prenatal. Do you see direct to consumer as your next big frontier? Along that lines, how is the ViaCell integration going?

So I would say the direct to consumer is an opportunity for us. I think there is a number of opportunities across the genetic screening business. I think that's just one of them. I think the combination of that channel we picked up ViaCell with hopefully the closure of the Pediatric Medical acquisition, I think allows us to do some confirmatory testing, some secondary testing. So I think that is an opportunity for us. But as I mentioned, there is a number of other things that we are looking at. And I would say the ViaCell acquisition seems to be going pretty well. They did have some good growth during the 45 days we owned them in 2007. And they continue to start 2008 in good shape. So, I think we feel pretty good about that.

All right. Thanks. We'd like to also offer our congratulations and best wishes to both Greg and you as you move on to your new roles.

Thank you.

Thanks, Quintin.

Next question comes from the line of Peter Lawson from Thomas Weisel Partners. Please proceed.

Hi. What has been driving the Optoelectronic business and the up margins there? Is it just volume? And is it sustainable?

Yes. Peter, this is Jeff. So a lot of what's driving that is just pure volume. The mobile phone revenue comes in at an operating margin that is favorable to Opto and favorable to all PerkinElmer, so we get a good lift out of that. In addition, the fixed cost nature of the facility, the fab for the amorphous business, the medical imaging business is such that when we add all this capacity, the cost is spread over a 20-year period because these are assets that last quite a while and the volume is ramping up pretty quickly. So the incremental profitability is quite high, which is going to allow us to continue to kind of push up the profitability of Opto as we move forward.

And then on the Viacell business, when do you start to see cross-selling benefits? And are there any other products that you are thinking of driving through the OB-GYN channel?

Peter, this is Rob. I would say probably middle to the back half of '08, if we were to expect to see some benefit from the cross selling, there is some training that is involved, and so I would say it's probably not going to be until sort of mid later '08. And I think we do look at other opportunities across the market to take advantage of this very significant channel we have into the OB-GYN professionals. So I think we'll continue to look for additional products and technology and services we can put through that channel.

And I think that will be an area of focus from a business development perspective, is to find smaller companies that would be kind of nice technology tuck-ins that don't have the financial bandwidth to kind of afford a sales force that is into the OB-GYN network. So we are quite intently focused on that.

Okay. And then, finally we have had a lot about weakness in the Japanese market. What's been happening there for you? Could you talk through the trends?

So I would say our Japanese business has been soft for quite a number of quarters now. So we haven't seen a significant change, I would say, more recently because we have been experiencing weakness probably through most of '07.

Is there any [pounds] of pick-up? Is there any structural changes that have to be placed?

Well you know, I think it's a combination of maybe some softness in the economy, as well as some operational improvements that we need to do with some of our operations in Japan. So I would say it's a combination of both. It's hard for me to comment on the economic turn around, but I think we are making something good progress in improving our operations in Japan.

Okay. Greg and Rob, congratulations on the road to transitions. Thank you.

Great. Thanks, Peter.

The next question from the line of Derik De Bruin from UBS. Please proceed.

Hi, Derik.

Derik, are you there? (OPERATOR INSTRUCTIONS)

Okay. It looks like I got lost in space there for a minute.

Yes. Sorry about that.

It pretty much describes my week. So what's your stock option expense guidance for the year 2008?

Excuse me?

For 2008.

It will be similar to what it was for this year, about $0.05 for the full year.

Okay. And it looks like the corporate costs were a little bit higher than we were expecting. Is there ability for that to start coming down?

Yes. I think what you'll find is that category can kind of move from quarter to quarter. We did have kind of some expenses go through there associated with kind of stepping up our acquisitions program and integration activity and just timing of kind of benefits. So I think it was a little higher this quarter, a little lower last quarter. But overall, it should move at a rate slightly lower than growth of sales.

Okay. Great. You know, you finished 2007 with basically a flat operating margin at around 12.7%. You talked about a 50 to 75 dip of expansion on an annual basis. What are you targeting for 2008? Do you see that coming through this year?

Derik, this is Jeff. I think we do see it come through. I think we have found in the fourth quarter that activity in and around ViaCell and some investments we've made, including some product transitions, we had to look more heavily on the operating margin. But given the investments we made back half of '06 and into '07, we think we are pretty well-positioned. I would suspect we are looking at 50 to 100 for the full year, probably starting at a little bit more slowly, probably 50 to 75 for the earlier part of the first quarter maybe into part of the second quarter, just because it's going to take us a little while because the ViaCell cost structure is right sized for the revenue to continue to grow into that business. So it is probably 50 to 75 for the first half and then up to 50 to 100 range for the back half.

Great. That is extremely helpful. You know I know you moved some of the ViaCell therapeutic programs into discontinued operations. Can you talk about your plans on monotyping those assets?

Sure. We have been actively involved, we've engaged a third party to help us market those assets, both the ViaCell site, that one in cryo preservation fertility product and the USSC research program. That's in the middle of a divestiture process and we are going to run an auction on both assets, so that is kind of proceeding according to plan. I expect we have a view, maybe perform a review at the end of the first quarter. If not, probably the second quarter as to kind of the outcome of that process.

Great. And just a couple final questions. The organic growth rate in life analytical science?

Organically, 7 we're % for the fourth quarter.

Okay. And the other division, OE?

It was 19%.

Great. And finally, you have noticed, you have had to pick-up the reagents GPCR, kinase, assays. I guess, how's this overall market doing in terms of the competitive landscape for the reagents? I'm curious about how customers do business in this area. Is there a lot of share shift going back and forth? What drives uptake of new assays? I'm just trying to get an open feel for dynamics there.

I think what drives it is -- I think what you're saying in the marketplace is you are moving from, what I would say, general purpose reagents to much more specific purpose reagents. And so I think we'd [drop] market shares if you've got the right reagents for the particular application, that is being run in the customer, I think that's how you win the business. And I think what we have been trying to do over the last year is to focus more of our R&D in those reagents and make them very specific, coupled with the acquisition we made of Euroscreen and the collaboration with Axxam on Photina. And so, we are trying to build these types of reagents around what we think are the higher growth prospects. And so that's what's been driving, I believe, our growth and I think we are taking some share in the reagent market as a result of that.

Okay. That's where I'm going next with this. Is this market -- I mean, considering what the pressure has been under from pharma and drug discovery, is this market a rapidly growing market? Is it stagnant? Are there share or loss going back and forth? How much is pharma biotech spending on new investments in drug discovery and in particular for the assays business.

I think you have got to separate it from assays and reagents and from instruments. I'm of the view there is still not a lot of increased investment going on the instrument side. It is more of a replacement. Now, there are certain techniques that I think they are investing in. So I think the cellular imaging area is a place where they are seeing some incremental increase in investment. But I think, overall that's flat. Although on the reagent side, there is continuing to be screening done and I would guess at that sort of a mid single digit growth rate.

Great. Thanks a lot and best wishes, Greg.

Thanks, Derik.

The next question from the line of John Grover from Merrill Lynch. Please proceed.

Good evening. Thanks for taking the call. I'll get the obligatory congratulations out of the way to both Greg and Rob.

Thank you, John.

Thanks, John.

I just want to make sure, you said something there, just to make sure I heard right, Jeff, and that was you expect 50 to 100 basis points of operating margin expansion for the year for 2008?

Yes. And I think what I said is, it is more in the line of 50 to 75 in the first half.

Right.

Probably bit more off in the back half, just by virtue of the fact that we are getting the ViaCell business integrated and working through the cost structure there.

Right. Just applying the revenue growth rates and then that type of operating margin expansion, assuming no other acquisitions, as you say keeping share count hopefully flat, you would be -- I would have you at a much higher earnings per share level than maybe what you were communicating previously in terms of how diluted ViaCell would be if you got more optimistic in terms of what you are able to do with ViaCell in '08.

You know, I think it's still early in the honeymoon period here with the ViaCell business. So I think we finished 2007 very strong from a revenue perspective and carry that momentum in 2008. So I would say it's more on kind of on the back of the existing business. But if you look at the kind of the range of our guidance and what I just communicated, I think you'll find what we said from a medium term perspective is probably not far off that.

Okay. And then, you mentioned this in some of your comments but no one has asked about this lab services business, which I keep finding intriguing given the one source and the growth rate that you are having and how no one else seems to be really be copying that model too much. Can you just maybe make some comments about that business itself, how that's developing, specifically built on one source, I guess.

Yes. This is rob. We continue to see good growth in that business and demand. And I think probably the more exciting aspect is, we are seeing demand outside the biopharma area. So in the fourth quarter, we actually were able to sign some contracts in the consumer products and food area. So I think it continues to do well for us. And we've got significant expectations for it in '08 as well.

From a margin standpoint, has there been any kind of surprises or shocks as you have gone through again on that one source business?

No. I don't think so. If you recall in the second quarter of '07, we talked about some investments we were making because of some big contracts that we had won. So the only issue from a margin perspective is sometimes when you win some of these large contracts, there is an investment required up front. But our service business operating margins are above the company average.

Okay. And could you just remind me. I don't know if you said this on the call when it was garbled or maybe you put out a press release and I'm just forgetting. But what was the discontinued operation that you guys have in there?

So there is two lines on the [penal], John. One is actually operating the two therapeutic programs of ViaCell. The results of that are on the loss from the discontinued operation sign, the first line. And the second line is actually loss and gain, a loss on dispositions of discontinued operations, and that is kind of the remnants of a settlement from a previous discontinued operations that happened a little while ago.

Okay.

It's kind of a one off of that, if you will.

Okay. And then, on the genetic screening and the maternal health, you mentioned you are still waiting for the PMA on the maternal health side. Any update at all as to when that may come through?

I think it still goes to our original schedule, which I think we have communicated, sort of late '08, probably into the market early '09.

And just overall, there's been some announcements from some other companies on new types of tests that are being developed and how do you see your competitive position? How do you see, you know, new competitors potentially entering? And what are kind of some of the new tests, either on the maternal or neonatal side that you guys are working on trying to introduce?

Well, you know I think we still feel very good about our competitive position. I would say on the maternal side, our PMA is going to be focused around the areas of pre-eclamsia, preterm birth and interuterine growth retardation and a number of other tests, but those are probably the three key ones.

And John, this is Greg. Some of the other tests that you read about particularly sort of feed on maternal DNA and so forth. I mean, some of those are fairly expensive kind of diagnostic tests. And most of what we do is screening. So we have the ability to process the samples, a lot of samples in a very cost effective way. It reaches out as opposed to the more confirmatory-type diagnostic tests, which we do some of with our spectrogenomics business, CGH rays and chromosomal defects. So I think as we look out and we look at sort of the power of having positive indications, we're basically for protein levels as an existing issue and the ability to process these very quickly and the fact that this is very accepted over a long period of time in the clinical environment and the fact the labs are set up to operate this way, that there is a sort of a tremendous sort of capability to that system. As it is today, it is very cost effective. So we don't see a huge amount of threat. Having said that, we do have technology programs in most of these areas, running and looking at these types of approaches, which at some point down the road may be viable. And so we are investing in a number of these areas as well. But we see those as kind of longer term practical opportunities.

So it's fair to say on that piece of business, your view of the world is that there will continue to be kind of a low cost screening of large numbers of patients and then more of the confirmatory types of tests, but those will be kind of few and far between potentially as opposed to mass migration, unless the costs get down to equal levels, perhaps.

Yes, it has to be a very simple procedure. But I would say a slight variation on that, John, which is I think the low cost screening is going to continue to expand rapidly, because from a public health standpoint, the cost benefit is very high. So really when you look at the penetration around the world, it's very low. As we talked about on the neonatal side, it is only 25% of the world's infants. And of that 25%, most of them are only receiving one or possibly two tests. Typically pkU. So we think there is tremendous growth within there because it is so cost effective, even in developing countries. And then you've got the rest of the population to be able to screen. So screening is kind of an early -- it's just still an early developing market. First you screen and then screening really becomes the indicator for then following up with a diagnostic test. I think that's the only way the economics will work, because you can't really start it and try to run diagnostics, nor would it make any sense to run diagnostic tests on large population sets.

Okay. And then last, just a very mundane question, Jeff. Could you just tell us what your basic shares were outstanding.

Basic at the end of the quarter were about 117 million shares.

Okay. Thanks. Congratulations.

Thank you.

The next question from the line of John Sullivan from Leerink Swann. Please proceed.

Hey guys. Good evening.

Hi, John.

Just to follow up on the genetic screening on the neonatal genetic screening are. At one point, I think there was talk about adding a second technology for neonatal screening with the concern being that maybe some of the emerging parts of the world might not have the expertise ready to operate the mass spectrometry-based screening. And you thought that maybe that was an impediment to adoption. Do you still feel that way? Is there a second platform being contemplated? Or how do you intend to approach this issue?

You know, John, we do it both ways. We do sort of basic fluorescent immunoassays, and then we do multiplexing through [tandem] aspect. Maybe what you're referring to is a vision that is just down the road. You may be able to put a much simpler kind of [mass spec] instrument out there because a lot of [mass specs] are driven by the research marketplace where they have to have a lot of different capabilities and in the diagnostics marketplace, it is just the same measurement over and over. So it is a much simpler, kind of more value-based products. I think there is a potential on that front. The technologies really aren't that expensive, I think at the end of the day with the potential to sort of take the instrumentation costs down.

Okay. So investors should view the current technology as able to facilitate the growth that you are looking for in some of these emerging markets in neonatal screening?

Yes.

Okay. Fair enough. And then, shifting gears for a second. Regarding digital flat panels for x-ray market, can you just talk for a second about how far into that opportunity you feel like, you feel like we are? How much of that market is turned over from film methods to digital? And just kind of give us some sense of at what point in that opportunity you feel like you are?

I think overall, we are in the early stages of it because if you think about it today, the digital flat panel digital x-rays, the taxes are still pretty expensive items. And so really, it's just hitting the high value applications. Over time, as volume grows, kind of back to Jeff's earlier point, as volume grows, then the cost per unit goes down. It is not dissimilar if you think about the microprocessor world. The penny, ever since the costs went down, they became much more ubiquitous. And so we see that happening. So really, it started with sort of high-valued medical diagnostics, and then it went -- it sort of opened up into the therapeutics side and then increasingly you find it in other associated medical, whether it is veterinarian or dental. And then you have the whole nondestructive marketplace -- nondestructive testing marketplace, which I think at the end of the day, will be the largest market, larger than the medical marketplace. And that really hasn't even been touched. So one, I think there is a lot of room to go in medical and you'll see more in kind of more value-based instrumentation, more portable instrumentation, a lot of market able to go out there, and then you'll see this whole unlocking of the nondestructive. So, as far as where it is in life, in its kind of life cycle, we think it is very early days.

Is there competing technology in the nondestructive market that you look at as kind of the of the current holder of major share? And where does digital x-ray have to come down to in terms of price in order to compete well?

There are a number of different imaging technologies used today. Everything from film to CCDs to a charged couple of devices to a number of other capabilities that are out there. So there isn't one particular magic number. I think what happens is as it continues to come down, we'll see it for example to security applications, where you don't see much of it today, right? And then you'll get into sort of online inspection. And part of this is not only sort of the cost per unit, but part of it is actually the technical capabilities. So the nondestructive testing has some of the most challenging requirements because people want to do it online inspection. For example, aircraft parts or engine blocks or something, as they come down the line, then want to scan every one of them and you'll basically set up a certificate of origin and inspection for that part as it comes through. So I think you'll see kind of a higher value product at the component level be captured first and then it will continue to move out through there. So you might see it from aerospace EC, you might see it in security EC and a number of those more quickly and a number of applications.

Very helpful. Thank you.

Yes, you are welcome.

The next question from the line of from Vivek Qana from Civic. Please proceed.

Hi. Good evening. I just have a question on the margins. How much did ViaCell affect the operating margin by on a percentage basis?

It was somewhere around 50 basis points.

Okay. Thanks.

You are welcome.

You have a follow-up question from the line of Derik De Bruin from UBS. Please proceed.

Hi, again. What is the -- when you look at the net interest expense for 2008, what are you targeting?

Well, I think we are in the middle of that right now, Derik, in terms of looking at the credit markets, the game plan as we currently have a bridge facility in place that will expires at the end of March. But, we are kind of looking at taking that bridge facility out with some permanent capital. So let me just give you an idea here, That number probably goes up to somewhere around, somewhere between $25 and $30 million.

Okay. Okay. That's fine. That is kind of where I was looking at that. And you've got that other income expense line that kind of fluctuates because of the FX impact. Is [1315] a generally good [run rate] for that?

Yes. It's somewhere between -- in some quarters we do better and some quarters we do a little worse depending on kind of what the currency markets do, but between 1 and 1.5 a quarters is probably not bad.

All right Thanks.

Welcome.

The next question from the line of Craig Leighton from Lord Abbett. Please proceed.

Hi. I know It is getting late. So I'll just as two real quick ones. No problem. Does the guidance include the pediatrics lab acquisition?

No, it doesn't at this point. But we expect that to be more or less neutral in year one.

Okay. And to close in the first quarter at some point?

It depends on regulatory approval but we would hope it wouldn't.

Okay. Terrific. Are you still expecting ViaCell to be diluted by $0.03 to $0.05 next year?

Yes.

Okay. Terrific. That's all I have. Thanks.

Okay.

At this time, assuming you have no further questions, I'd like to turn the call back over to management for closing remarks.

Great. Okay. Thanks, everyone, for your participation and interest in PerkinElmer. We appreciate it. We had an excellent fourth quarter, and are well-positioned to sustain the growth of our business in 2008. This call is adjourned. Have a great evening. Thank you again.

Ladies and gentlemen, thank you for your participation on today's conference. This concludes the presentation, and you may now disconnect. Good day.