賽默飛世爾科技 (TMO) 2002 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to the Invitrogen Corporation fourth quarter and full year financial results conference call.

At this time, all participants are in a listen only mode.

A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference, please press star zero on your telephone key pad.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Mr. James Glynn (ph), President and Chief Executive Officer of Invitrogen Corporation.

You may begin.

Good afternoon, I'm Jim Glynn I'm President and CEO.

With me today on the call, Eric Winzer (ph) Chief Financial Officer.

Also on the call are Vic Knoll (ph), President of sub culture (ph), John Corino (ph), VP of Research and Development, and Paul Goodson, VP.

Investor Relations.

We'll all be available to answer your questions after remarks.

Before we begin, I want to caution listeners that our discussion today will include forward-looking statements that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.

It is our intent that those statements be protected under the safe harbor created by private security litigation act.

And we refer you to the risk factors listed in today's press release and our SEC files including our most recent 10K and 10Qs.

I hope all of you have seen our press release for the quarter.

At our investor conference in December, we rejected we projected 2002 revenues were 649 million and pro form ma EPS would be $1.80.

Our actual results were consistent with that guidance.

The projections we made in December were made on several expectation I would like to review in more detail.

First, we are projecting the molecular biology kits and reagents would grow in low and double digits this is based on a softening demand by customers especially in the commercial segment.

Our fourth quarter results reflecting softening demand.

Demand continues to grow among (inaudible) tool space but at a slower rate than in the past.

This is the basic premise in our 2003 expectation reflected (ph) in our 2003 guidance.

Sub culture products remain strong.

In the fourth quarter, culture revenues grew 15 percent aid by price increases across board.

We are projecting revenue growth of 10 percent or better for cell culture products in 2003.

Our services and primer business were down year to year in the fourth quarter but showed sequential growth from the third quarter of 2002.

The businesses represent less than 10 percent of our overall revenue.

We are committed to competing successfully and profitable in these businesses and we believe we're moving in the right direction.

We have addressed service and cost issues in both businesses.

In addition we're making sure we are price competitive in the primer business.

Other significant expectation in our fourth quarter financial guidance concern operating expenses.

Our philosophy in 2002 was a significantly increase in several areas particular in sales and marketing and R&D.

We have since moderated this philosophy in the terms of the pace of business.

We are still committed to make prudent investments in these area, but a rate more commensurate with our current growth of our business.

Our goal is to deliver pro forma operating income of 23 percent of revenue in 2003 and we are committed to leverage our operating expenses to obtain that goal.

I would like to note that acquisitions remain an important part of our growth strategy.

In October, we announced the acquisition of InforMax, the leading software company for conducting molecular biology experiments.

We have made significant reductions and have put it on the road to profitability.

There are important synergies in this acquisition including the opportunity to more effectively market InforMax products or sales channels and later the possibility of using the vector NTI software as a useful tool for directing customers to our products.

Just last week, we announced the plan acquisition of product lines and technology rights from Aurora biosciences and PanVera now part of Vertex pharmaceuticals.

We are excited about these acquisitions for a number of important reasons.

Fundamentally this acquisition augments our product offering in areas where the market is heading, protein function, cellular and biochemical assays and labeling detection technologist It gives a large patent portfolio.

Approximately 300 patent, patent pending and licenses that will form the basis of new product offerings and new technology platforms that utilize this intellectual property base in connection with Invitrogen and existing technology.

With that, I would like to turn this over to Eric Winzer to review the financial results and expectations for 2003.

Thank you, Jim and good afternoon.

You ever provided details a revenue and Jim has added his remarks so I'll comment on other aspects of our fourth quarter results.

Our gross margins were 58.6 percent in the fourth quarter compared to 54.8percent pt fourth quarter of 2002.

We have spoken a number of times throughout 2002 about our success in raising gross margins over (inaudible) by exiting low margin businesses, raising prices and con tang costs.

Our fourth quarter gross margins compared with the fourth quarter of 2001 demonstrate that success we have had in that area.

I would also like to point out a change some our gross margins from the third quarter of 2002 to the fourth quarter of 2002.

While our overall sequential gross margins were very comparable our molecular biology gross margin improved from 62 percent to 63.7 percent.

A significant portion of this improvement was the result of cost reductions gained when we closed our Huntsville operations in the second and third quarters of 2002 and moved these operations to California.

Our cell culture margins decreased from the third quarter of 2002 to the fourth quarter, largely due to lower gross margins for the FBS.

FBS margins were particularly high in the second and third quarters of 2002 as FBS selling price increases benefited gross margins before cost increases had worked their way to inventory.

Jim mentioned earlier that our fourth quarter operating expenses were above our target levels and indicated our goal to better leverage these expenses going forward.

Our marketing and selling expenses were 34.4 million in the fourth quarter representing 21.3 percent of revenues.

Included in this amount was 700,000 of marketing and selling expenses for InforMax.

Marketing and selling expenses in the fourth quarter of 2002 included significant spending for after thing and promotion and other marketing programs.

Our general administrative expenses were 20.4 million in the fourth quarter renting 12.6 percent of sales.

Included in these expenses were 2.4 million related to our management transition and 1.3 million related to the InforMax business.

Excluding these items general and administrative expenses were 10.4 percent of sales which is comparable to cent quarters.

R&D expenses were 6 percent of sales in the fourth quarter of 2002, the highest level of 2002.

Excluding the 600,000 dollars of R&D expenses from the InforMax business, R&D expenses were 5.7 percent of sales.

Our earnings under generally accepted accounting principles were 20 cents per share compared to 70 cents per share in Q4 2001.

The principal (inaudible) a loss per share to a positive number is the accounting change under which good will is no longer amortized.

We have discussed this change previously in our calls this year and have included tables in our press release that explain the effect of this accounting change.

Our pro forma earnings per share which excludes business integration and amortization expenses was 39 cents in the fourth quarter compared with 38 cents in the fourth quarter of the previous year.

Our fourth quarter 2002 results were reduced by four cents per share for costs related to the management transition and for losses at the recently acquired InforMax business.

Turning to the balance sheet, our total cash and investments were just below 1.1 billion at December 31, 2002.Operating activities generated approximately 24 million in cash during the fourth quarter of 2002 and capital expenditures were just over 8 million.

Our day sales outstanding improved another day in the fourth quarter and stood at 53 at year end.

Inventory balances rose slightly during the quarter due to higher cell culture inventory balance.

Now we've discussed our financial performance for the fourth quarter I would like to comment briefly on out outlook for 2003 before we take questions.

At our investors conference in December, we provided a detailed analysis of our expectations for 2003.

If you would like to review that presentation, it is still available on our website.

We remain comfortable with the projections we gave in December, specifically, we projected revenues of 728 million for 2003 and pro forma EPS of $2.05.

In addition, we project that first quarter 2003 revenue would range from 175 to 180 million dollars and pro forma EPS would be between 47 and 49 cents.

Our projections do not include results from the potential acquisition of PanVera.

Because of the timing of the actual closing of any acquisition is not certain we will exclude these from our projections until that uncertainty is removed.

We still expect the PanVera acquisition would add 22 to 24 million dollars in revenues and two to three cents of pro forma EPS to our 2003 results if the closing occurs in the next 30 to 60 days.

We will add appropriate amounts to our 2003 projections when the timing of the acquisition is known.

That concludes my comments.

Operator, would you please explain the procedure for audience to ask questions.

Excuse me, ladies and gentlemen.

At this time, we would be conducting a question and answer session.

To allow everyone the opportunity to ask questions, please limit your time to one question and follow-up.

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Our first question comes from Mr. Drew Malick (ph) from First Analysis.

Please state your question.

Good afternoon, everyone.

I'm sorry if I missed this already.

Could you talk a little bit more about what you're seeing just overall in the market, any trends, any dynamics in the fourth quarter and moving into the first?

We've seen at our business sequentially is actually was up slightly in the fourth quarter over the third quarter.

And early indications are it's continuing that trend largely somewhat flat, not a lot of growth there, but also not down --.

Primarily volumes, I'm assuming pricing is remaining down at that level.

That's correct.

There's been continuous price pressure in that business.

All right.

Thank you.

Next question comes from Lachime Poderaj (ph) of Salomon Smith Barney.

Please state your question.

Hi, just a couple of questions on the revenue line.

Could you give us a little bit more detail from molecular biology sales in terms of what revenue growth rate you saw in the cloning and expression business as well as the amplification and the separations and purification business.

And also in the cell culture business, what can we expect in terms of revenue growth going forward for the serums line?

Okay.

We typically don't get into the details of cloning expression, separations and amplifications, separations and analysis, rather.

We have seen most of the those businesses growing during the year at fairly comparable rates within quarters, some go up and some go down.

The overall growth rate that we saw for those businesses in the fourth quarter is 11 percent.

It's probably not far, too far away from any one of the individual segments.

And your next question was about the cell culture.

What did we see the serum business growing into in 2003, is that the question?

Right.

Vic, do you want to handle that one?

Yeah, we are projecting serum to grow in 2003 somewhere in the 7 to 8 percent range.

And that compares to something like 15 percent for '02?

Actually, in '02, it was closer to 11 percent.

Okay.

Okay.

Thank you.

Our next question comes from Miss Sherry Walker (ph) with Suita Bank (ph) please state your question.

Good afternoon.

Hi, Sherry.

Your SG&A number was higher than expected.

Could you give me some guidance on your targets first quarter and for 2003.

Yeah, sure, Sherry (ph).

We are targeting numbers for marketing, selling and marketing expense of about 19 percent, 19, 20 percent.

G&A about 10 percent and our R&D overall around 7 percent.

And I would assume it would be higher in the first quarter as you work off some of the InforMax expenses.

Might be slightly higher.

Sherry, as I said in the presentation, we have rolled back expenses from the fourth quarter in the first quarter so I think you'll see some stabilization here in the first and second quarter.

Okay.

Then when you talk about gross margin the sequential improvement, was there a small contribution there from InforMax?

Yes, actually, there was a very small contribution, and the note revenues were about 1.6 million.

There was a very small several tenths of a point increase due to that.

Okay.

And then finally, you give us an update on the CEO search?

We have engaged the search firm and we're actively reviewing candidates.

But we still think it will take, you know, 60 to 90 days to identify the right person.

Great.

Thank you.

Our next question comes from Derek Debruin (ph) with UBS Warburg, please state your question.

Hi.

A couple of points.

Just looking at the InforMax acquisition, so you saw 1.6 million dollars in revenue this quarter.

I know your guidance for 2003 is for 16 million.

Could you give us some, you know idea of if you still think that goal is achievable and if you know, if the current concerns that people have with funding issues might slow down people's purchase of software?

And the second point on this is also with InforMax.

I just heard --say you saw a benefit from the acquisition to margin and I was under the impression that software would have a lower margin than for manage like for say your consumables business, could you just clarify that a bit?

Thank you.

Okay.

The gross margin actually with software business, gross margins are very high.

Most development costs go in through R&D and the actual costs of sales are very low.

There's not much left once the software has been developed, there's just some packaging and some software, a little bit of support, but very high gross margins in the mow -- software business.

Our goal for next year versus what we did in the fourth quarter, I'll remind you that the fourth quarter revenues only included about one month of results.

And we are still comfortable, still expecting a contribution we described in New York of 16 million dollars of revenues in 2003.

As far as the spending goes, right now, we don't think that slowdown on spending will impact that.

We'll see how things develop throughout the year.

And we hope to see impact based on the efforts of our sales force.

Our sales force are generating leads for that software on behalf of the InforMax team.

Okay.

Thank you very much.

Our next question comes from John A.J. with Oppenheimer Capital.

Please state your question.

Yes, hi.

I got a question on the molecular biology core growth and deceleration that we saw that there to 11 percent in the quarter.

Another player in the consumable space actually had a weak quarter, much weaker than yours and they actually had a couple of excuses including the comparison with last year post September 11th and also the extra holidays this year from where the Christmas and New Years holiday fell.

Mitigating circumstances that drove that down a tad.

I think that we underestimated in December that the growth rate for molecular biology was going to be in that 10 to 12 percent range.

I don't think there was anything unusual in the fourth quarter that changed that, that we were aware of where the holidays fell and we think that's where we're going to be this year and that's what we're trying.

So you're not trending to see a rehabilitation right now to 16 percent.

No.

No, I don't think so.

Okay.

Can you also give me an update on where the NIH budget stands in terms of where you see it and how it will affect your business?

You know, based on your view of the timing of the approval.

Well, we expect that the NIH budget to be approved think evening and we believe it's going to be about 16 to 17 percent for 2003.

So that should have a favorable impact on our business.

And the timing should be just in line with what you had expected because.

The timing is pretty consistent with the last couple of years.

Okay.

Great.

Thanks.

Our next question comes from Robert Olin (ph) with Dear Field Management.

Please state your question.

The guidance that you reiterated for '03, that also does not include share repurchase?

That's correct, Rob.

Okay.

Thank you.

Our next question comes from Paul Knight (ph) with Thomas Wiesel please state your questions.

Hi guys, how are you are?

Good, Paul.

How are you?

I understand your ORF clones are in the market.

What's been the response to that and when were they introduced?

John, do you want to handle that?

Sure, we introduced an initial small targeted set right at the beginning of December, numbered about 300 clones, roughly.

We followed that up with a launch of another 3,000 clones, just over the past, just within the past two weeks.

And we continue to drive toward adding as many clones to that collection in as short a period of time as possible.

So I think the availability of a larger number of clones now and the availability of customers to be able to take a look and sort through those clones and see not only the initial smaller set, which was directed really towards some specific drug target family, but now to have the slightly larger set that encompasses more is going to help drive that forward.

So it's the very early stages, we launched the initial small set in December.

Have followed up in the past two weeks with a larger set and will continue to add to it.

So it's something that it's going to be evolving over the course of this year.

And the biggest sets are in the CHIANASE areas and GPCRs.

Yes, the initial sets.

So some Genes that we know are very important to certain drug Discovery customers.

And in your customer mix, how would you describe that for this new product line?

Certainly for those targeted sets, for the families that represent drug targets and variance of potential drug target, we think that biotech customers are going to be most interested in those clone, but we also think that a p all of the clones in general are just going to be interested in academic and government researchers as people try to define function associated with various genes.

So we think the broader collection appeals to the basic research community, appeals also to the biotech and pharma customer, but clearly there will be an emphasis of those customers on genes that are associated with drug Discovery efforts and the variance of those Genes.

Okay.

Thank you very much.

Our next question comes from John Sullivan (ph) with Stevens Incorporated, please state your question.

Hey, guys.

Can you speak for a minute.

First of all, just looking for a little bit of clarification.

You talked about cell culture media benefiting by pricing strength in the fourth quarter, is that correct.

That's correct.

Did you talk about SPF pricing impact on the fourth quarter results again?

We mentioned that gross margins actually came down slightly and cell culture as the FDS gross margins decreases due to cost increases earlier in the year work through inventory.

That was the discussion we had.

So that's an older effect.

And can I just ask, in molecular biology as the catalogs are going out, are they having the price increases seen in previous years early in the year and how are those price increases being received if so?

The catalogs are out including the new pricing.

The pricing is a little more conservative than last year.

And at this point, we don't see any pricing push back.

Our next question comes from LaVina Teludar (ph) with State Street Global Advisers.

Please state your question.

Most of my questions have been answered, but just in terms of the NIH budget being delayed up until now, I know something it's like more like a three year phenomenon to be approved so late, but are you seeing any kind of conservative spending thus far to make January and however long we're in February harder?

No.

We're not seeing anything like that right now.

Okay.

So basically then sales are going just as you assumed it would go?

Yes.

Okay.

Great.

Thank you.

Once again, if you would like to ask a question, please press star one on your telephone key pad.

Our next question comes from Aaron Geist (ph) with Robert W. Baird.

Please state your question.

Good afternoon.

Most of my questions have been answered but I'll still throw out a few to be specific.

In the cell culture arraign in a and area, can you talk about growth a little bit more in the bioproduction area.

You've been helpful if breaking down growth for the serum business and other areas of the cell culture, can you talk more about bioproduction and if you have knowledge of any large biologicals that would hit the market in the near term that would create annuities.

Vic you want to handle that one?

Sure.

The growth rates overall in by grow production that we're seeing right now, globally they're at about 14 percent, quite healthy however in the Americas region in total we're doing about 21 percent growth in bioproduction, Aaron.

And as far as any new biomolecules, there's nothing that I'm at liberty to comment on right now.

The second question I had ask you've hired a search firm for a new CEO.

Can you talk about the directives that you've given the search firm in terms of the type you're looking to run the company?

Well, we're looking for a world class executive, hopefully from the lifetimes industry that has, you know, run a public company of size similar or larger than ours with international operation, someone with wall street experience, you know, top notch individual.

Best of luck.

Thanks.

Our next question comes from Karen Rosbremner (ph) in with Shaker Investments please state your question.

Quick question on SBS.

Has pricing remand stable or are you starting to see that come back in?

Vic, you want to handle that?

Missing to the end market or raw materials?

Raw materials.

Raw material costs we think has stabilized compared to the end of the third quarter early part of the fourth quarter.

So we've got that projected as stable for 2003.

If it does bump up at all, you won't see anything as significant as we did in 2003.

Right, I guess I was wondering do you see those prices coming back down to the levels they were in maybe 2001.

I don't think so.

Because the demand is still quite strong for the raw material.

Okay.

Thank you.

You're welcome.

Our next question comes from Carl Progren (ph) of CRN.

Please state your question.

I'm association I joined the call a little bit late so I apologize if you've already gone over this, could you tell us what the ending share count for the quarter was and how many shares you bought back?

Ending share count.

It was I believe just over 50 million.

Actually outstanding.

And we have bought back in our entire repurchase program this year about 3.3 million. 2002, sorry.

Okay.

And I just want to make sure I understand all of the nucleotide trends, you mentioned it's stabilized on a unit basis but pricing is still a big negative.

Is that the major component of why it would still be down 29 percent?

Yes.

And when you look at '03 versus '02, I guess what would be the overall trend in -- low we're getting to the anniversary of when this began to weaken.

So I'm looking at how much of a drag it will be for the overall biogroup.

Overall, we think the prices will continue to decline in maybe the five to ten percent range, but we also expect volume to be actually in about the same range going up.

So we're expecting the -- go business on a dollar basis to be relatively flat maybe split growth overall 2003 over 2002.

Okay.

Thanks very much.

Our next question comes from Derek Debruin (ph)with UBS Warburg, please state your question.

Hi.

Could you tell us if there was a foreign currency in effect this quarter?

Thanks.

Yes, there was a foreign currency effect on the top line.

It was about 2 percent, I believe.

Our final question comes from John A.J. with Oppenheimer Capital.

Please state your question.

Just a follow upon the fetal bovine serum, I was wondering if you would consider maybe might have f moving from FIFO to LIFO at least maybe for that product line just to better effect the economics of that business and take out some of the volatility, it wouldn't really change your '03 numbers give given the stability that you're expecting and it could, you know, save some artificial volatility in the future?

I don't think we would go that way.

That's a change in accounting principle and it's tied up in some different tax considerations as well.

So it's probably not something we would adopt, hopefully we'll just be able to explain the effects on the FIFO basis rather than adopt LIFO.

Okay.

Thanks.

Mr. Glynn, there are no further questions at this time.

All right.

I would like to thank everyone for participating in today's call.

A replay of the call will be available for the next 30 days.

Thank you very much.

This concludes today's teleconference, thank you for your participation.