賽默飛世爾科技 (TMO) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2007 Invitrogen Corporation earnings conference call.

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

(OPERATOR INSTRUCTIONS).

At this time, I would now like to turn the call over to your host, Ms.

Amanda Clardy, Vice President of Investor Relations.

You may proceed.

Thank you.

Good afternoon, everyone.

Welcome to Invitrogen's second-quarter 2007 earnings conference call.

Joining me on the call today are Greg Lucier, our Chairman and CEO; David Hoffmeister, our Chief Financial Officer; and Karen Gibson, our Chief Information Officer.

If you have not received a copy of today's press release, you may obtain one from our website at invitrogen.com.

Before we begin, I want to remind our listeners that our discussion today will include forward-looking statements, including but not limited to statements about future expectations, plans and prospects for the Company.

We believe that these statements are based on reasonable assumptions, but actual results may differ materially from those indicated.

It is our intent that these forward-looking statements be protected under the Safe Harbor created by the Private Securities Litigation Reform Act of 1995.

Additionally, we will be discussing GAAP and non-GAAP measures.

A full reconciliation of the non-GAAP measures to GAAP can be found in today's press release or on our website.

For today's call, we will be referencing a presentation that you may view online.

Instructions to access that webinar are on our website.

Additionally, we will be posting the presentation to the investor relations portion of the site following the conference call.

One more item to note before we begin the call is we'd like to inform you of an additional financial document that you may find helpful.

As you may recall, last quarter we provided you with revised non-GAAP financials for 2006, which excluded the impact from divestitures.

This quarter, we have prepared one more document which provides the same detail by our two reporting segments, BioDiscovery and Cell Culture Systems.

You can find this file on our investor relations site under financials, GAAP reconciliations.

I will now hand the call over to Greg.

Thank you, Amanda.

I'm pleased to report another quarter of solid results, which is our third consecutive quarter of financial improvement.

We continue to execute upon our three focused areas, which include driving organic revenue growth, optimizing the mix of products sold and improving our operational efficiencies across the Company.

We are very encouraged with the progress we've made against these initiatives and the financial results we delivered so far this year.

Now, this quarter, we reported revenue of $322 million, which represents 13% growth over the same period last year.

For the first half of 2007, we've grown revenues by 11.5%.

In the second quarter, operating margins percent was consistent with last year's level because, although we had margin expansion from increased volume, this improvement was offset by a greater mix of Cell Culture Systems revenue, which has a lower margin, and an increase in our incentive compensation expense as compared to last year.

Non-GAAP earnings per share without stock option expense increased by 35% to $1.15, and non-GAAP earnings with stock option expense increased by 42% to $1 per share.

In the last 90 days, we have accomplished quite a bit.

Both divisions, BioDiscovery and Cell Culture Systems, had terrific quarters and posted solid organic growth.

Additionally, we benefited from the settlement of a lawsuit, which is the second quarter in a row of such settlements.

We plan to continue to proactively defend our patents, as well as monetize others through out-licensing.

Price was favorable this quarter, as we continued to roll out tools and training programs for our sales representatives around the world.

In addition, we have several businesses that are managing price in a much more sophisticated, dynamic way, such as our sera research group, which I'll talk about a little bit later.

These efforts are resulting in positive price realization, which has bolstered revenue and margin growth.

We closed almost all customer-facing issues resulting from our enterprise resource planning system implementation in North America, which Karen Gibson will explain in a moment.

We also reached record levels of e-commerce, with 57% of all orders being placed online within the Americas.

Finally, we returned another $50 million of cash to our shareholders via our buyback activities, with purchases of approximately 700,000 shares.

Additionally, we announced today that Invitrogen Board of Directors has approved a new $500 million share buyback authorization to take place over the next three years.

As we did last quarter, I will go over the progress we've made against our three focused areas for 2007 in more detail.

Organic growth -- our organic growth was driven by every region in every major product area.

A few highlights to share with you -- BioDiscovery had a greater-than-expected growth in the quarter, with 8% organic growth as a result of vibrant portfolio, award-winning products and a reenergized, disciplined sales force.

This is resulting in growth in all areas of BioDiscovery, and we are particularly pleased with the growth we've seen in our molecular biology products because it was broad-based, rather than driven by one product segment or customer.

Additionally, we are benefiting from our focus on monetizing our substantial intellectual property portfolio via out-licensing and OEM relationships.

In fact, large orders from OEM customers were able to offset the impact we experienced from our enterprise resource planning system implementation.

We will aggressively pursue further opportunities that monetize patents, which should drive further growth, albeit lumpy because of the episodic nature of the demand.

Our Americas business had another great quarter.

Despite the typical disruptions due to this system implementation, this region posted 9% organic growth.

The morale and momentum of this team has never been better.

Asia-Pacific also did well.

This quarter was driven by double-digit growth in the emerging markets.

Cell Culture Systems delivered 18% year-over-year growth without the impact from currency.

This growth was driven by all businesses within the segment.

One of those businesses I would like to highlight is our sera research business.

Now, in order to reinvigorate growth from our sera research product line, we reorganized and implemented a new approach to managing this commodity product.

The key to this product line is to optimize the margin while maintaining competitiveness and customer flexibility.

Some of the steps we've taken in the last nine months to accomplish these goals are the following.

We created a centralized proactive pricing management team.

This has allowed us to respond more rapidly and dynamically to win more deals.

We eliminated higher-cost collection sources and worked through high-cost inventory, resulting in reductions to our overall average product costs.

Our sales personnel that are allowed to sell sera now have their compensation tied directly to gross margin dollars.

This incentivizes the salesperson to optimize mix while still fulfilling customer needs.

We also put in place several new capabilities that allow customers to maintain the flexibility they need in testing and delivery, but don't have excessive costs to us.

A lot-matching software application and globalized product labeling are two just examples.

All in all, a new team and a new approach are being employed in this area and are paying off handsomely for Invitrogen and the customer.

On our second initiative in terms of optimizing mix, we also made progress.

We now have more tools and techniques to focus the sales force on the best opportunities within their territories to maximize sales and margins.

The positive trends we're seeing in the sales of our molecular biology product line, such as transfection, proteins gels, qPCR and reverse transcriptase, are the best indicator that our plans are working.

An example of how we learned to focus and have this pay off is the way we have integrated growth in our cell transfection product area.

Invitrogen has been the leader in this very important space for years, with cutting-edge products like Lipofectamine 2000.

In mid 2006, this position was being challenged, though, by copycat products and because, quite frankly, we did not channel the full force of our sales team onto this important product line.

In the past year, we have been able to totally reverse the sales trend for transfection through a combination of tactics, launching a completely revitalized product line to meet the changing customer needs -- for example, Lipofectamine RNAiMAX, FreeStyle MAX and a more potent Lipofectamine LTX.

We also made the transfection product family a core part of how the Invitrogen sales representative makes his or her quota.

Finally, we invested more capital into a marketing campaign to reinvigorate probably one of the most recognized brands in life sciences, Lipofectamine.

This is a great example of how we're providing our sales team with clear focus and supplementing that with marketing efforts that can move the needle in our run rate business.

Finally, operational efficiencies are being achieved, mostly as a result of volumes so far this year.

However, we continue to make progress implementing Lean techniques across all our manufacturing plants.

In particular, we have made enormous strides within our Carlsbad, California operation, our largest facility in the world.

In the coming quarters, we will share with you more information on our progress to drive productivity gains throughout the entire supply chain.

In summary, the results we achieved this quarter were a combination of thorough action plans, solid execution and positive market dynamics.

That's not to say we don't still have work ahead of us, but we are encouraged by what we have been able to accomplish in such a short period of time.

I will now turn the call over to Karen Gibson, our Chief Information Officer, to give you an update on our North American enterprise resource planning implementation that we completed on April 9th.

Karen?

Thank you, Greg.

Good afternoon, everyone.

I'm happy to provide another update on our recent ERP implementation.

As Greg said earlier, overall we are pleased with the implementation of this project.

Implementing such a system is always a disruptive event, and it does bring about challenges in the normal daily operations of business.

The quantitative effect of the impact to us has been in the range of a couple of million dollars, or approximately a day's worth of transactions.

Obviously, our greatest concerns in implementing ERP were any issues that directly affected our customers' ability to do business with us.

Some of the disruptions that customers did experience during the first few weeks of implementation were in the delivery of orders, incorrect shipping label information and the timeliness of invoicing.

As expected, call rates increased into our customer call center.

We're continuing to staff our call center slightly higher than normal to give our representatives time to adjust to the new system.

We also experienced some startup issues in our internal operations.

But since the software has been in place in Europe for over a year, the fundamental processes are sound.

We are now turning our focus to optimizing our use of ERP, so we can achieve the maximum benefits from the system.

This implementation of ERP is a major milestone in our journey to build a world-class IT infrastructure for this business.

Invitrogen recognizes that information is a key asset for our company, and is committed to investing in IT tools in three areas to leverage that information.

First, we will continue our investment in ERP, leveraging the work to date in order to speed our delivery and optimize our supply chain.

We will also continue to to integrate our Asian region and newly acquired companies into our ERP program.

Second, understanding our customers, their research, knowing what they buy and how they buy is critical for our ability to meet customer demand.

We're investing in stronger customer relationship management and business intelligence tools to better analyze and anticipate their needs.

Finally, we're committed to maintaining our online channels as the leading standard in the industry.

Future improvements will include search engines, more targeted content, personalization tools and easier ordering processes.

We view our website and the online experience as a critical extension of the overall customer experience with Invitrogen, and we plan to continue the investment in this area to truly make that experience world-class.

So in summary, we're pleased with the implementation of our ERP system, and look forward to updating you in the future on other key milestones as we work to build out a unique, customer-focused infrastructure within the life science industry.

Thank you, Karen.

This is David Hoffmeister.

Good afternoon, everyone.

Let me provide you with some more detail on our Q2 and first-half financial results.

This quarter, we grew 13% including the impact of currency, 11% present without currency.

BioDiscovery grew 10% year over year or 8% without currency to $223 million.

Volume, price, mix all contributed to growth in BioDiscovery.

In addition, we benefited from licensing revenue from a patent infringement legal settlement.

This settlement provided $5.4 million of additional revenue.

BioDiscovery growth was broad-based in all regions, even in the US, despite the IT system implementation, which did cause some disruption in customer orders and delivery, as Karen noted.

Although it's hard to quantify the effect precisely, we estimate it had an impact of $2 million to $3 million on the quarter.

On the other hand, large OEM orders, specifically in our Dynal business, offset revenue loss from the ERP implementation, so that our overall growth rate was not impacted.

Cell Culture Systems had an outstanding quarter, with 20% growth or 18% without currency to $99 million.

The growth was driven by solid performance in all business units.

Production media once again grew in double digits.

As a reminder, this is a lumpy business which is highly sensitive to order timing.

Based on the first-half results in this business unit and harder second-half comparable, we would not expect the second-half growth rates to be equivalent to the first-half rates.

That said, we remain very bullish on the long-term prospects of this business, and believe it will continue to be a significant driver in our overall growth.

Research media had another good quarter of growth, driven by sales of both basic and specialty medias.

The sera business unit grew in double digits as a result of strong growth in both research and production.

Growth in production sera was related to timing of orders, but we expect this business to decline over time.

However, we no longer expect the total sera business to decline by 10% this year.

At this time, we anticipate it to be flat to only slightly down.

As it relates to currency, we had a $6 million benefit this quarter or 2 points of growth.

The first half of 2007 currency has provided a benefit of $14 million.

The currency flows through to income at a rate slightly below the total corporate operating margin percentage.

Gross margin was down 63.7%, down 60 basis points from Q2 2006.

The reduction was a result of higher sales in our Cell Culture Systems segment and a 1 point decline in BioDiscovery gross margins.

The decline in BioDiscovery gross margin was a result of one-time royalty expenses associated with legal settlements and slightly higher operating and supply chain costs in our antibody plant.

Sequentially, gross margins declined 1.2 percentage points.

The decline was due to a greater mix of Cell Culture Systems revenue, specifically sera, and higher OEM sales.

Moving on to other line items of the P&L, operating expenses increased by $12.5 million over prior-year levels, mainly as a result of higher employee-related expenses, including incentive compensation, as well as outside legal fees and marketing programs.

Sequentially, operating expenses increased by $10 million.

The sequential increase in expenses was expected and due to annual merit increases, increased ERP depreciation, additional marketing programs, higher sales commissions and outside services.

Operating income was $77 million, an increase of 13% year over year.

Operating margin was 24%, which was consistent with last year's levels.

The operating margin leverage we received this quarter versus last, as a result of increased volume, was offset by mix and increased operating costs, as noted earlier.

Year to date, however, we increased operating margin by 90 basis points.

Interest income was $7.9 million versus $7.7 million last year and $4 million last quarter.

Other income was $350,000.

Interest and other income combined increased sequentially, due to the legal settlement discussed earlier, a higher cash balance resulting from the BioReliance divestiture and slightly higher interest rates.

Interest expense was $6.9 million in the quarter.

The non-GAAP tax rate was 30.5% of sales, 1.1 points below last year, due to the R&D tax credit approved late in 2006 and the distribution of income by tax jurisdiction.

Our diluted share count for the quarter was 47.7 million.

We continue to execute upon our share repurchase program, buying approximately 700,000 shares for $50 million in the quarter.

We have now completed the $500 million authorization approved by our Board in July 2006.

We have purchased 8 million shares within the last year under this authorization.

Non-GAAP earnings per share without stock option expense for the first quarter was $1.15, which is an increase of 35% over last year.

Non-GAAP earnings per share with stock option expense was $1.00, an increase of 42% over last year's levels.

Our stock option expense was $9.7 million pretax, $7 million after tax and $0.15 per share.

This compares to prior-year levels of $10.6 million pretax, $8.3 million after tax and $0.15 per share.

Net stock option expense has decreased by 14% year over year.

GAAP earnings per share were $0.62 as compared to $0.35 last year, representing a 77% increase year over year.

As a reminder, there's a full reconciliation between GAAP and non-GAAP measures in today's press release and on our website.

Also, for those of you who follow our GAAP results closely, you may have noticed in today's press release we have started to recognize the amortization of purchased intangibles in cost of goods sold rather than in operating expenses.

The reason for the change is that the majority of purchased intangibles are related to patents and licenses of commercialized technologies associated with acquisitions.

The new treatment reduces GAAP gross profit, but has no impact on operating margin.

Additionally, it has no impact at all on our non-GAAP results.

Through the first six months of 2007, we delivered 12% revenue growth, a 90 basis point improvement in operating margin percentage, 18% growth in EBITDA and a 34% growth in non-GAAP EPS.

Needless to say, we're very pleased with these results and feel it's a sign of strength of the Company's position in the marketplace, sound operating plans and solid execution thus far.

Free cash flow for the quarter was $54 million.

This represents an increase of $48 million over the previous-year level.

As you may recall, the timing of our cash tax payments was such that there were none in the first quarter of this year, and therefore we had two in the second quarter of $22 million in total.

Capital expenditures were $15 million.

Year to date, free cash flow has been $111 million.

We ended the quarter with $570 million of cash and short-term investments.

As announced in our press release today and as mentioned by Greg, our Board approved a new $500 million share repurchase authorization covering a three-year period.

The timing of the purchases will depend on quarterly fluctuations in cash associated with operating cash flow, capital expenditures and acquisitions.

This is consistent with our previously announced commitment to return excess cash to our shareholders.

I will now move into our expectations for the full year.

Based on our first-half performance, we now expect to achieve revenue growth for the year in the mid single-digit range, without the impact of currency and one-time legal settlements.

We continue to expect EPS to grow three to four times the revenue growth rate.

We're continuing to focus on the program that we outlined at the end of last year of sticking to the basics, and although we're seeing the benefits of this approach, we still have a lot of work ahead of us.

We are concentrating on delivering consistent and sustainable financial performance, while ensuring the Company is positioned for long-term success.

Now let me give you a little more detail on our financial expectations.

We expect a tax rate of 30.5% if you exclude option expense from pretax income, and 30.9% if you include it.

We anticipate $7 million of interest expense per quarter.

Interest income will fluctuate based on our cash balance.

Share count in the second half of the year will be approximately 48 million, which does not include the impact of any further buybacks.

FAS 123(R) expense will be slightly below the second quarter, as the expense from old grants gets fully recognized by the end of September, similar to the seasonal pattern experienced in 2006.

As you know, we do not provide quarterly guidance.

But consistent with our past practice, we will provide qualitative thoughts on the upcoming quarter.

The third quarter is usually our softest quarter, due to the seasonality caused by the vacation schedules of our customers.

Additionally, order timing for production customers has been favorable in the first half of the year, and we do not expect that to continue into Q3.

Gross margins will fluctuate based on mix and volume, and we expect it will be in the range of 62% to 65%, with the second half being lower than the first half, due to lower volume in Q3, and a greater mix of OEM orders in Q4.

Operating expenses are expected to be approximately equivalent to the second-quarter level, although we intend to continually manage our costs to keep them in line with revenue growth.

We're entering the second half of the year in a good position.

We have a balanced portfolio of products in geographies that are all contributing to our total Company growth.

In addition, we continue to launch new products each quarter, which should drive future growth.

We continue to execute upon our improvement plans in the short run, while investing for the long term to ensure we deliver consistent value to our shareholders.

Let me now hand the call back over to Amanda.

Thank you, David.

We can now open up the lines for questions.

(OPERATOR INSTRUCTIONS).

Quintin Lai, Robert W.

Baird & Company.

Congratulations on another nice quarter.

As you now set a new authorization for share repurchases, could you kind of give us a little update on what you view Invitrogen's acquisition strategy is going to be over the next little bit?

Then, what are some of the areas that you might be looking at?

In terms of what we do with our cash, first, let me just say that we wanted to make sure that if we have excess cash that the buyback is a method by which we can return that excess cash to our shareholders.

That's why the Board of Directors reauthorized another $500 million to potentially be returned.

Now, in terms of our acquisition strategy, in 2007, as we said, we're very much focused on doing the basics.

But when we do find potential either technologies or platform companies that can add to what we're doing, and they are very complementary to our core focus on tools and technologies, then we will make an acquisition.

At this stage, we have only completed one acquisition in 2007, Cascade Biologics, and our goal is to really continue just to do tuck-in acquisitions between now and the balance of the year.

With respect to your BioDiscovery, a good quarter.

Did you see any positive impact on the molecular biology from the departure of one of your competitors that is precluded from the market now?

Yes, we did.

Just to touch back, then, on the fiscal 2007 guidance that you've given, the revenue growth excludes the amount of the legal settlements.

So could you give us the first-half revenue impact for those legal settlements, David?

About $10 million.

John Sullivan, Leerink Swann.

Congratulations on a good quarter.

Specifically in BioDiscovery, could you comment on whether an increasing proportion of the business is coming under supply contracts and, furthermore, whether an increasing portion of the business is really benefiting by the steps that you have taken to improve your web interface with clients?

Can you just talk about whether the business is coming to you in a different way?

Thanks for that question.

In fact, we are seeing increasing volume coming from the web, and we believe that more and more business and growth will come from the web.

We are seeing increased conversion from other order modes, whether it's phone or fax, to the web.

As you know, over the last few years, we have a lot of effort and money into the IT infrastructure to allow a pretty darn good web experience.

We don't see any stop to that trend.

In fact, if our projections are accurate, most of our business in the future, several years away, will be really across the web.

Is more business in BioDiscovery of daily consumables coming to you through global contracts with your big clients, or has that not really changed?

We have global supply contracts with all our major clients around the world, for the most part, but I don't see any increased proportion coming from those agreements.

Europe especially strong for you -- was there a change to the distribution channel or a change to headcount that was significant in Europe that benefited the quarter?

We have a very good European team.

I think they are executing quite well.

At the same time, though, we did have, I think, a favorable comp in Europe, in particular, due to the ERP implementation last year in that region.

Jon Wood, Banc of America Securities.

Greg, just in general, qualitatively, have the financial sponsors been active in competing for the size assets you guys have been interested in?

I guess my question is, does the deterioration in the credit markets help you in the acquisition market or not have much of an impact?

I would say that we have not run across any financial sponsors in terms of any acquisitions we have looked at historically.

Again, just my own subjective opinion -- these are extremely technical businesses, and require very aggressive integration into something.

I just think it makes it a little tougher for a nonstrategic to be in this tools and technologies space, per se.

Then, can you comment -- I know you said the strength was broad-based, but could you offer some comments on the faster-growing businesses, the antibody business maybe in Dynal, or how much faster are they growing than the core molecular Life Technologies legacy business?

The way we look at our business on the BioDiscovery side, or even really across the entire portfolio, is cell-based technologies or molecular-based technologies.

I'd say a universal statement is the cell-based technologies, especially in BioDiscovery, are growing much faster than the molecular-based technologies.

That's where we've made virtually all our acquisitions over the last four years, because we had a particular viewpoint that the world would move from molecular-based to cellular-based in terms of research, and we wanted to be well-positioned there.

So about 40% of our portfolio now is cell-based in terms of tools, and that grows much faster than molecular.

RNAi appears to have picked up some steam again in the therapeutics market.

Can you just remind us of how big that business is for you?

Has growth accelerated in that business there of late?

We don't disclose how big it is, but it certainly is one of our most vital tool areas.

It does grow in double digits, and we have seen a marked pickup in the last couple quarters in RNAi tools.

Derik De Bruin, UBS.

Several companies have discussed that, looking at the BioProduction market, the second half of 2007 is going to be slower than the first half.

Could you just give a little bit of color in terms of what is going on in the manufacturing space as to why everybody is talking about a -- why was it so good in the first half, and why is everyone being so cautious in the second half?

I can't comment on the other companies participating in this space.

I can say that the first six months of this year have been extremely strong for us.

We think that the long-term demand is very strong, because we know the products that we're working with our clients on.

I think we're just being prudent in our guidance to say that the second half may not be quite as strong as the first half, simply because the first half had been so strong.

Looking at the operating expenses, David, you said that for the back half of the year, it would be equivalent to second-quarter levels.

Is that on a percentage-of-sales basis or absolute dollar amount?

Dollar value.

Could you just give us a little bit more color on what was the OEM contribution in 2Q?

I guess, typically, you have OEM orders that come in the 4Q.

Are these similar orders, different orders?

I think mostly in the 4Q it was typically Dynal orders?

Yes.

Could you just repeat the question again?

Sure.

I just wanted to know the contribution from some of the OEMs in the quarter.

I guess typically we've seen your OEM orders have been more in the fourth quarter rather than earlier in this year.

If I remember correctly, a lot of the OEMs happen to be related to the Dynal business.

Could you just give a little bit more color in terms of what the OEM contributions are?

Yes.

Our OEM business continues to expand.

We have additional opportunities there that we're aggressively pursuing.

You are correct that traditionally we've got our largest OEM sales in the second half of the year, specifically in the fourth quarter, and that is related to Dynal.

So we do expect to continue to see that seasonal pattern, particularly in the second half of this year.

Tycho Peterson, JPMorgan.

Congratulations on the quarter.

I guess, as we think about maybe the near or intermediate-term strategic view here, can you give us a sense of potentially the extent there are gaps in the portfolio or focus areas beyond the existing portfolio?

I know you've talked in the past about some of the instrument launches with iBlot, and you have got the Mayo collaboration potentially on the diagnostics side.

How do you prioritize various R&D projects, and where should we be thinking about the allocations going forward?

That's a pretty broad-based question.

I'll take a stab at it.

But our current focus, I'd say, right now is to go even deeper into the segments we're in.

So I think what we've decided to do is very much focus in tools and technologies.

So if we have a presence in a particular area, let's say like transfection, our goal is to go even deeper into that with more of the reagents, potentially more of the instruments and really become a market leader, if you will, in virtually everything around that segment of tools and technologies.

So that's how we look at our portfolio today in terms of R&D investments, and it's also how we prioritize our acquisitions.

It really, and the end, makes integrations and really all sorts of assimilation of technologies much easier, because it builds on strength that you already have.

With regard to the sales force, you've talked about the new kind of comp plan that was been in place earlier this year.

Can you give us a sense anecdotally of how it's all going?

Are people pretty energized?

What has the turnover been like versus expectations?

Yes, you bet.

I just got back from our mid-year US sales meeting, and I have never seen a more charged-up group of professionals in a long time, in my career.

Everybody is making money.

They know how they are making money.

We are giving them great tools.

I think we have great leadership, and the energy level has just never been higher in my tenure here.

The turnover rate has plummeted, and I think just this USA team is really doing quite well and we are really proud of it.

Going forward, is it kind of selective additions?

Or how do we think about growth in the sales force?

I'm not going to comment on that.

We have lots of different ideas of what to do.

I will tell you that our goal is to really remain vibrant in every major life science research lab in the world, and if that means increasing coverage, then so be it.

But it also could mean, in addition, putting a lot more money into the web.

We look at all channels as a way to just increase our presence with scientists around the world.

Thank you very much and congratulations.

Dan Leonard, First Analysis.

You've touched in a couple different parts on your second-half outlook and how you expect your Cell Culture Systems business to maybe be.

You are at least forecasting that to be more conservative in the second half.

Can you speak to the BioDiscovery business?

Is there any reason that growth rate should slow from what we've seen in the first half of the year, in the second half?

I'd just like to emphasize again, I think our original guidance was low to mid single digits.

We have taken guidance up for the year.

We are now saying mid-single-digit growth rate, reflecting the group that we've experienced in the first half of the year.

As we said earlier in the call, we've had just a phenomenal first half in BioProduction, driven by a variety of factors.

As we've also said previously, that business is inherently lumpy, and we don't expect that kind of growth rate to continue for the entire year.

So that's one factor.

Our BioDiscovery business is doing better than we had anticipated, driven by the improvements that we've made in the sales force and the strength of the product portfolio.

That's more of a run-rate business, and we expect that to basically continue at about the rate that it has, although, as we've said, we're continuing to execute on our back to the basics program, which is focusing the sales force, et cetera.

We expect to see some results on that.

But again, I think that the growth rate that we experienced in the first half of the year is basically what we're looking at in the second.

Thanks for that clarification, David.

Now that you've passed another large IT milestone, can you remind me what your IT spend is, and how you expect that to trend over the next couple of years?

Our IT spend, in terms of capital, is about 50% our total capital expenditures.

We expect -- at this point, we've not developed our budget for that going forward, but we continue to see good investments in terms of IT.

We are very pleased with the benefits that we're getting from our enterprise resource planning system.

Greg talked about the increased number of orders we're getting from the web.

So we're going to continue to put investments into IT as long as we think that we're getting a positive return on them.

Paul Knight, Thomas Weisel Partners.

David, on this $5 million settlement or, I guess, royalty payment, should we take that out of operating income to get to an ongoing operation operating margin?

Is that the correct way to approach it?

Yes, that is the correct way to approach it.

(multiple speakers).

Then the next question, Greg, would be, where do you stand now regarding the visibility quarter to quarter of the BioProduction business?

It seems like it's obviously better.

Is it A versus a C level a year ago, or is it better based on ERP, the sales structure, et cetera?

We think our visibility here in 2007 on the BioProduction business on an annual basis is very good.

In terms of quarterly perspective, I think that's just a little bit more questionable, just due to the timing of the orders of when we get them and when they are delivered.

But on an annual basis, our forecast of the BioProduction space is pretty solid.

You feel like, annually and quarterly now, it's easier to project -- do you feel that way -- than it was a year or two ago?

I'm sorry, Paul?

If you could just say the question one more time?

When you sit there and say I can project it on a yearly or a quarterly basis, do you feel more comfortable now with your tools in place than you did a year ago?

100% better.

Jon Groberg, Merrill Lynch.

A lot of my questions have been answered, so it's mainly left for me to say congratulations again on a great quarter.

People have been pretty subdued here.

Maybe you can just -- another way to look at this -- you're talking about your IT investment priorities.

On the ERP, I know you still have Asia to do.

Not to -- and I hate baseball analogies, I guess, but if you had to use a baseball analogy, with respect to CRM, business intelligence, online channels, where are you in that investment process, do you think?

We're about halfway through our overall IT strategy.

Clearly, implementing ERP was a necessary first step.

I think, as we go forward, you hit the nail right on the head.

The areas that we're going to focus on are tools that really drive analytical understanding of the data throughout our business and tools that make us more competitive and easier to do business with.

The first quarter, you had the $5 million legal settlement, $5.4 million here.

Anything expected for the rest of the year of that magnitude?

We won't comment on other settlements or large OEM deals or royalties.

I would just simply say that we've taken a much more progressive approach to out-licensing our IP, monetizing our IP and being creative on how we do that.

over the longer term, we really see this as a way to add to the overall revenue stream of the Company.

Without maybe giving numbers, then, on the OEM side that you said made up for the shortfall that you've lost perhaps due to the ERP, maybe refresh me -- I'm a little newer to the story here -- exactly what people were doing.

Were people using some of your technologies without payments, and you've just gotten more aggressive at ensuring that they do pay?

In this particular case, it was a case of infringement on our intellectual property, which we had a jury decision agree with us on, but we ultimately reached a settlement with the other party whereby they left the market and included this settlement payment that we disclosed today.

So this would be also kind of more of a one-time event, though, then?

I think he was actually -- Jonathan, were you actually asking about the OEM, which is a separate item?

Is that what you are asking about?

Right, right, right.

He's asking about what is OEM to us (multiple speakers).

I'm sorry.

OEM is original equipment manufacturer, and this is where we supply reagents to other companies in the life science space for them to package it up in their own offering to clients.

Right.

No, I understand that.

I think, unless I understood -- mistake -- I didn't understand when David was talking about it.

I think he said that it was due somewhat to a more aggressive stance on your part of making sure that you were protecting your intellectual property.

So I wasn't sure if they were previously not --

Oh, I'm sorry.

These are new customers, new deals that we've been doing this year.

Than last question, related -- you haven't talked much about drug discovery, some of the services, maybe a little bit of your outlook, how it's been in your outlook there?

It's a business that continues to grow, important to the portfolio.

I think the trends are positive for drug discovery tools overall for the business.

Quintin Lai, Robert W.

Baird.

Just going back to the discussion about Cell Culture, from the Q1 call, you talked about looking at bulking up some of your infrastructure in Grand Island, maybe some headcount.

Are you progressing with that?

Then, with respect to your second-half outlook, it sounds like that it's really kind of unchanged from where you were in Q1, and it's just a function of being relative to a very strong Q1.

Is that correct?

I'd say, on the second part of your question, that's exactly the sentiment we're trying to convey, is just a prudent outlook relative to a very strong first half.

Said nothing has really changed from the commentary we gave in Q1 relative to BioProduction.

Then, in terms of the first part of your question, of making investments to keep up with this demand, that's very much of what we're doing, both in terms of operators and professionals but also beginning the implementation of a larger-scale capital investment program over the next several years to keep up with demand.

Then just a housekeeping question, to follow upon Paul's question about the $5 million settlement.

I thought during the prepared remarks that there were some expenses that came along with that.

Or did that $5 million go all the way down to the EBIT line?

There were some expenses associated with that.

But for your modeling purposes, I think you can assume that most of it goes down to the income line.

Derik De Bruin, UBS.

I have a follow-up.

It looks like you're going to easily get your 100 basis points of operating margin expansion in 2007.

Could you care to speculate at all on 2008 and where you think the -- where does the margin go?

I'd rather not speculate right now.

How about provide an accurate estimate?

Well, I think at this point, we are still concentrating -- we're focused on 2007.

As we get close to the end of the year, and if we continue to execute like we've been executing, we'll be in a much better position to tell you what it's going to look like next year.

At this point, I'd like to turn it back over to management for closing remarks.

Thank you.

This will now conclude our second-quarter earnings conference call.

This call will be available via replay on our website for one week.

We look forward to seeing many of you at our annual investor day in two weeks at our molecular probes facility in Oregon.

If you have not already received them, you can obtain details for this event on our website.

Thank you again for joining us this afternoon.

Ladies and gentlemen, this concludes the presentation.

Thank you very much for your participation in today's conference.

Have a great day.