賽默飛世爾科技 (TMO) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2009 Life Technologies earnings conference call.

My name is Stacey, and I will be your conference moderator for today.

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

We will be facilitating a question-and-answer session towards the end of the conference.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Ms.

Amanda Clardy, Vice President of Investor Relations.

Please proceed.

Thank you, Stacey, and good afternoon, everyone.

Welcome to Life Technologies' first quarter 2009 earnings conference call.

Joining me on the call today are Greg Lucier, our Chairman and CEO; Mark Stevenson, our President and Chief Operating Officer; Bernd Brust, our Chief Commercial Officer; and David Hoffmeister, our Chief Financial Officer.

If you haven't received a copy of today's press release, you can obtain one from our website at www.lifetechnologies.com.

Before we begin, I'd like to call your attention to a few additional items that will be helpful for you during our call.

We've now posted a revised 2008 quarterly pro forma income statement on our website that combines Invitrogen and Applied Biosystems' financial results down to operating income.

This revised pro forma income statement reflects financial results for Applied Biosystems using the same calendar quarters as Invitrogen's, rather than their previous [4-4-5] method.

In addition, we have now provided quarterly revenue detail for our new technology divisions within Life Technologies.

In 2009, we will be comparing all of our results against this revised pro forma income statement, so I encourage you to retrieve this document at your earliest convenience.

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, integration plans and prospects for the Company.

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

It's 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 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 can view online.

Instructions to access the webcast are also on our website.

Additionally, we will be posting this presentation following the conference call.

Greg will begin today's call with highlights of the quarter and our 2009 imperatives.

Mark Stevenson will follow with an update on divisional performance and integration.

Bernd Brust will then provide some detail around our go-to-market integrations, and he will be followed by David, who will give a more detailed review of the Company's first quarter operating results and 2009 expectations.

With that, I will now hand the call over to Greg Lucier.

Thanks, Amanda.

We couldn't be more pleased with the results delivered in our first full quarter as a combined company.

It's a strong start to the year, with that performance driven by good results in both legacy businesses, despite the tough macroeconomic conditions we all face today.

In Q1, total company revenue grew 1% to $785 million.

Revenue growth without the impact from foreign currency was 5%, with consumable and instrument revenue contributing equally.

Gross margin was a robust 66.7%.

Operating margin improved by an impressive 190 basis points to 26.2%, mostly as a result of synergy realization.

Operating income improved 9% or 17%, excluding the impact of currency.

All of this resulted in non-GAAP earnings per share of $0.72.

As you can see from our results, our business remains good despite the current economy.

As we've said before, our industry in general and our company in particular, tends to be relatively resilient in tough economic times, although I will admit no business is recession-proof.

I believe this performance once again demonstrates the strength of our operating model, the diversity of our technology portfolio, and the hard work of our people.

It shows how essential our products are to the everyday work of our customers.

Our products are just about the last thing to be cut because of the criticality of them in our customers' ever-important work.

In order to maintain our competitive edge, we are focused on three important objectives this year -- growing our core business; flawlessly executing upon our integration plans; and investing for future growth.

The first objective, growing our core business, focuses on delivering our current customers the best possible products, service and support.

Both Invitrogen and Applied Biosystems have a long history of leadership in the life science tool space.

Researchers in every field of science use our products every day, while doing the fundamental research that will advance scientific discovery.

In fact, a recent survey of researchers done by an outside firm, concluded that our products can be found in over 90% of life science labs across America.

These are great results.

However, in this ever-evolving field of life sciences, we cannot afford to rest on our laurels.

Our R&D teams and business leaders strive to stay one step ahead of the research curve in order to identify where markets are heading.

We're always looking at ways to improve how scientists do core research to make workflows faster and simpler.

In the first quarter, we launched hundreds of new products, reached a record level of web traffic, and achieved positive new customer growth -- all of these results are indicators that our core approach to winning is working.

The second objective we are focusing on in 2009 is executing flawless integration.

You will hear more about the integration later on from Mark and Bernd, but let me say that it continues to go very well.

We remain very confident in our ability to achieve our 2009 synergy target, and more importantly, every day, we get one step closer to fulfilling the promise of this combination where great instrument technology, coupled with great reagent science, delivers breakthrough solutions in the world of biology.

The third and final objective I want to talk about today is how we intend to invest in the future.

One of the great benefits of our core business is that our product mix, heavily weighted toward high margin consumables, allows us to generate enough cash to continue to invest in the future of our business, while still meeting shareholder obligations.

While we pay very close attention to executing our strategies of today, we are always looking ahead at what might come next.

And we see a bright future in applied markets, including molecular diagnostics; regenerative medicine tools, including our leading work in stem cells; and the emerging field of personalized medicine.

We are believers that genomic data will be essential in tomorrow's medical practice, and that is why we are investing heavily in our sequencing roadmap, as well as the tools that follow the decoding of a genome.

Before I hand the call over to Mark, I would like to take a moment to thank all the employees of Life Technologies for their continued efforts in making our company a success.

At Life Technologies, we are committed to excellence in everything we do.

In the first quarter, beyond these good business results, we also received an important piece of recognition for our work in environmental sustainability, by being named to the FTSE For Good Index Series, which is an investment vehicle designed to facilitate investment in companies that meet globally-recognized citizenship standards, and have met stringent social, ethical, and environmental criteria.

We are taking the same rigorous execution mindset to making a difference in our communities.

We think it's the right thing to do, and will also add to our bottom line by reducing our need for expensive natural resources.

I will now hand the call over to Mark, who will give you a more detailed update on the integration and also provide some color commentary on the divisional performance.

Thanks, Greg.

And I would just like to echo Greg's comments about our employees and extend my thanks to them as well.

As you know, we now operate with four technology divisions -- Molecular Biology Systems, Cell Systems, Genetic Systems, and Mass Spec Systems.

Each division has its own unique set of products, and as such, each quarter provides more color as to the dynamics in each one, and some of the recent product launches that highlight the return from our R&D investments.

Let me start with our largest division, Molecular Biology Systems.

This division had revenues of $367 million, which represents approximately 4% growth, excluding the impact from currency.

In this division, we have all of our PCR technologies, our core molecular biology reagents, which are basics used in labs around the world, as well as all the associated royalties.

Growth in this division was driven by continued strength and demand for reverse transcription enzymes and genomic assays, as well as very stable demand for our core molecular biology reagents.

Molecular Biology Systems launched some exciting new products in Q1.

The first I'd like to highlight is the launch of the neon transfection device, a benchtop tool that simplifies the delivery of DNA, RNA, and proteins into a wide range of mammalian cell types, especially difficult-to-transfect cells, such as many types of primary and stem cells.

The second product launch I'd like to highlight is a new line of genotyping assays, the TaqMan copy number assays.

These assays enable researchers to better study how these copy number variations, or changes in the number of copies of a gene or a part of a gene, alter DNA and affect processes such as cancer and neurological disorders.

The Cell Systems division, which includes our cell analysis, cell culture, beads-based and stem cell technologies, had a strong quarter, with revenues of $192 million, which represents approximately 7% growth, excluding currency.

Revenue growth was driven by strong performance across all product areas, with the exception of sera and services that we target to pharmaceutical customers.

In Q1, the Cell Systems division launched a new addition to its knock-out brand of gold standard reagents, which are used in the culture of human embryonic stem cells, further bolstering our position as the number one stem cell reagent provider.

Also during the first quarter, we received the AmeriStar award for the new GIBCO bottles that were launched last year.

Customer adoption of the new bottle design has been very strong, and we continue to see good results from this product innovation.

Next, we have Genetic Systems with revenues of $219 million in the first quarter, which represent 6% growth, excluding currency.

We had growth in CE instruments and consumables as usage of installed CE machines continues to expand, and sales into the forensic market grow in double digits.

Revenues from our SOLiD systems and consumables continued to grow significantly during the quarter.

We were focused on upgrading our customers to SOLiD 3.0, and upgraded 60% of version 2.0 sites to version 3.0 during the quarter, and will complete all of the upgrades by the end of this current quarter, Q2.

Customer adoption has been good, and we received positive feedback from our customers that 3.0 system has better reliability and easier workflow and increased throughput.

SOLiD 3.0 throughput is 20 to 30 times that of SOLiD 1.0, so we are pleased with the technical progress we are making.

We continue to win new business and form strategic collaborations and alliances.

An example of an innovative alliance around next-generation sequencing is the agreement we announced today with Amazon Web Science Services and Geospiza.

As many of you are aware, one of the biggest challenges with any next-generation sequencing system is the storage and analysis of the data produced.

We know this issue is particularly difficult for some of the smaller research labs.

Through this arrangement announced today, Amazon is going to enable researchers to store and access vast amounts of sequence data in the "cloud" or on the Internet.

Geospiza will provide analytical tools and software applications to help researchers analyze their data.

As the leading provider of next-generation sequencing technologies, we think it's crucial for the success of our customers for us to continue to partner with other innovative companies, to address bio informatics issues and to make these solutions available for our customers.

While we are pleased with the technical progress that we have made with SOLiD 3.0, we also recognize that we are not where we want to be in this market.

We do have a clear roadmap on deliverables in the next 12 months, and we are continuing to invest significant resources in the SOLiD platform to amplify where we have advantages, and throughputs and accuracy, while also simplifying the workflow and further reducing the cost per run.

It's important to also note that the field of research centered around this next-generation sequencing technology is really just getting started, and progress to date in terms of customer wins and technological achievements cannot be used as a measure to predict the future.

We are the leading company in sequencing, when it comes to a breadth of offerings, and we plan to uphold this position and through both internal and external investments that we're making.

We realize there are many different types of technologies and business models that may prove to work in the future, and we plan to have a lead role in many of them.

Finally, moving on to the last technology division of Mass Spectometry, our joint venture with MDS, this division had revenues of $123 million in the first quarter, which represents a decline of 1%, excluding currency.

This was slightly above our expectations, due to the successful launch of our Triple Quad and QTRAP 5500 in Q4, for which we experienced good uptake and recently earned the Scientist's Choice Award from Select Science.

We had strong growth in the applied markets area, offset by declines in the pharma market.

Our service revenue grew robustly in the quarter, as customers extended the utilization of their existing systems.

And just a couple of weeks ago, we launched yet another new system -- the MALDI-TOF 5800, focused on the high-growth proteomic segment.

As I hope you can see, we are increasing the cadence of new technology introductions in this business to maintain our market leadership.

At this point, let me switch gears and give you an update on where we stand with the integration.

As Greg said, we continue to track well with our plans.

The successful integration of two companies as large as Invitrogen and Applied Biosystems is no small task, which is why we have put a considerable amount of time and effort into the planning, resourcing, and execution of each part of the project.

As we have said before, we have over 50 full-time people working on this integration.

And this core team is supported by hundreds of other individuals within the Company to ensure that we are successful.

Because of this focus, we have already seen significant progress towards our goals.

We have taken considerable cost out of the business, actions to date will generate $60 million in savings this year, about 75% of the way to our 2009 goal of $80 million.

The majority of these cost reduction have come from the elimination of redundant overhead, procurement savings, and small facility closures.

As you can see from our scorecard, we are on track in most areas.

Regarding the yellow status we have in distribution, it's actually quite minor, as we work to refit a facility that we'll use to consolidate our East Coast distribution activities.

The retrofitting has been pushed back a couple of months; hence, we set it at a yellow status.

There is, however, no impact to customers as a result of this delay, and it will not impact progress towards our synergy goals.

It does, however, give you an idea of the level of scrutiny and attention to detail that gives us confidence to say that the integration is on track.

The attention to detail will be particularly important in the second quarter, when we turn our attention from planning some of the more difficult aspects of the integration to executing on them.

There is a lot of challenging work that needs to be accomplished in Q2, and you can look forward to continued updates from us on our progress.

Finally, I wanted to make some mention on the important issue that has been in the news these last couple of days.

I'm sure you heard about the swine flu that has been seen in Mexico, the US and other countries.

Since middle of last week, we've been working with local, national and international government health officials to help identify this deadly flu strain.

We're doing everything we can to help, and as of today, we shipped to several government agencies our 7500 Fast and 7500 Fast DX Real-time PCR instruments for use in detecting the flu strain.

And we are in the process of validating one of our influenza kits that can be used to identify this strain of deadly flu virus.

We are in a good position to offer agencies everything from the sequencing of the systems to the identification kits and systems, as well as field support personnel with critical molecular biology sets and knowledge.

We're less concerned about the revenue impact this activity will provide, and at the moment, just more focused on helping agencies throughout the world quickly identify and detect the swine flu to prevent unnecessary deaths in the future.

With that, I'll hand it over to Bernd.

Thanks, Mark.

As you've now heard, it's been a very nice start to the year.

And of course, beginning any year strong is always critical and really sets the tone for the rest of the year.

Given the context of the general economy, integrating new teams, and just the everyday challenges of winning, we are very pleased with the results.

Together with the customer care, marketing and pricing functions, the selling teams did an amazing job executing upon all their objectives.

My personal gratitude goes out to every individual around the world for staying focused and delivering a great quarter.

One of our guiding principles in our integration planning has been to ensure that customers are not negatively affected by the merger, while at the same time, making sure that the new benefits, such as broader access to our products, are made available as soon as possible.

For this reason, we continue to move slowly and deliberately when executing initiatives that have a customer-facing aspect.

We spend a considerable amount of time planning and training our employees for the implementation of the new go-to-market strategy.

In Q1, we ran several pilot programs on selling select AB reagents through both the Invitrogen website and the Invitrogen supply centers.

These pilots are going well.

We have worked out the kinks that always come up, and we are now beginning to put more AB products through these new channels.

In Q2, we will continue our careful preparation and begin to move into the full technical implementation of our go-to-market initiatives that are designed to provide even greater value to our customers.

As you know, we continue to maintain two platform brands -- Applied Biosystems for instruments with linked reagents to optimize workflows, and Invitrogen as the premier source of reagents, kits and services that can be used on a variety of instrument provider's equipment, as well as our own line of smaller benchtop devices.

A key component of our go-to-market strategy is to leverage Invitrogen's capabilities and commercializing highly technical run rate products through our best-in-class commercial channels, such as our sales teams and e-commerce capabilities.

Our award-winning invitrogen.com website had approximately 3 million hits in Q1, an increase of about 20% from the last year, with record revenue pullthrough.

We are about to launch even more improvements to the website that will simplify product selection and ordering.

These new features are part of a series of improvements designed to create a significantly enhanced online retail experience.

This channel will continue to be very important, as we add more AB reagent products to it, and thereby leverage the reach of this channel to simplify how customers find and buy our products.

We've also done quite a bit of work on the pricing side.

In Q1, we completed our typical list price review process for Invitrogen and also added on a review of the AB reagent portfolio.

Now let me point out that this year in particular, it's not all about price increases.

In fact, during this economic situation, our overriding goal is to work very closely with our customers to ensure that the pricing on our products is structured fairly, and that we remain competitive with our peers.

Before I turn it over to David, I would like to spend a few minutes talking about the work we have done to prepare for the NIH stimulus funding.

Our focus is on helping our customers get these funds for breakthrough research.

We have been reaching out to customers and when we can, we're helping them write grant proposals.

We have also accelerated our quote turnaround times, so that customers' grant proposals are not delayed waiting for information they need for submissions.

Because of the potential impact of the NIH stimulus funding on our business, we did recently conduct a very detailed analysis of our academic and government customers in the US.

We believe a good estimate of the percentage of our business that is funded by the federal government is between 15% and 20%.

Our customers in this segment have a sizable opportunity for future funding from the stimulus package.

However, it is hard to quantify the exact size of this opportunity for our company, as our customers work through the grant application process.

Our rough estimate as of now indicates that the revenue opportunity provided by the NIH stimulus funding could be well over $100 million over the next 18 months.

Our new quotes volume have seen record levels over the last two months for instruments, including SOLiD and mass spec.

And to ensure that we are well-prepared to take advantage of this opportunity, we have pulled together a cross-functional team of fully dedicated people who are tasked with executing on specific strategies, that will put us in a position to maximize the revenue opportunity amongst our NIH-funded customers.

And as I mentioned before, our goal is to partner with our customers to first help them get funding, and second, work with them to ensure that our products and services are available to help them accelerate their research.

We have some new and creative ideas about how to do this, but for competitive reasons, we won't be sharing specific details around our strategic plans.

However, it should be clear that we are focusing on this opportunity as a way to strengthen our existing relationships with customers, and also form new partnerships with them, as they take advantage of this exciting opportunity to advance their research.

We do not expect the stimulus funds will start to have a material impact on our revenue until the Q4 timeframe.

With that, I will turn it over to David so that he can walk you through our Q1 financial results.

David?

Thank you, Bernd, and good afternoon, everyone.

I'll now take you through the financial details of the first quarter results.

Before I begin, let me remind you that we are comparing all of our non-GAAP financial results to the pro forma income statements that we've published on our website, combining Invitrogen and AB for all of 2008.

This quarter, we grew revenue to $785 million, an increase of 1%, including the impact from currency and 5% without currency.

We're clearly pleased with this level of organic growth, which was the result of solid performance across most of our business.

You will notice that our non-GAAP revenue is $9 million higher than our GAAP revenue.

This adjustment to GAAP sales is associated with the deferred service revenue acquired through the AB transaction.

This non-GAAP adjustment provides a better comparison year-over-year, as well as associates revenue with the cost of these ongoing service contracts.

Organic growth in the Americas was negative 1%, as a result of a decline in royalty revenue and weak demand in pharma and biotech, although academic, government and applied market sales continued positive growth trends.

Europe and Asia-Pacific had strong organic growth at 12% and 28%, respectively.

And although Japan was flat for the quarter, consumable demand was higher than it's been in the recent past.

Division revenue was $367 million for Molecular Biology; $219 million for Genetic Systems; $192 million for Cell Systems; and $7 million for Other.

This Other revenue of $7 million is associated with our Mass Spec division, but is not a part of the joint venture and consists of consumable products used on discontinued mass spec systems.

Currency this quarter impacted revenue growth by approximately 4 points, net of our hedging.

The negative impact to EPS was approximately $0.09 and included foreign currency FX accounted for in revenue, other income, and the mass spec joint venture.

Moving on to other line items, non-GAAP gross margin was 66.7%, an increase of 30 basis points from Q1 2008.

As compared to last year, we had less royalty and settlement revenue, which had a negative impact on gross margin percent.

This decline was more than offset by lower royalty costs, synergies from renegotiated sourcing agreements, improved freight recovery, and better pricing optimization.

First quarter operating expenses were $318 million, a decrease of $8.6 million over prior-year levels, due mostly to the impact of currency and synergies, somewhat offset by increases in compensation, benefits, and depreciation.

Sequentially, operating expenses grew by less than 2%, as we kept costs in tight control until we saw how the overall business would be affected by the macroeconomic environment.

Operating income was $206 million, an increase of 9% year-over-year, including the impact from currency, and 17%, excluding the currency impact.

Operating margin was 26.2%, representing 190 basis points of improvement over prior-year.

This level of operating margin expansion resulted primarily from the realization of integration-related synergies.

In terms of other income, we had $1.4 million of interest income.

Our mass spec joint venture contributed $10.4 million of non-GAAP income, and this was somewhat offset by $1.7 million of other losses, mostly due to foreign currency.

Interest expense for the quarter was $38 million, which is slightly lower than we anticipated, but we suggest that going forward, you continue to use an estimate of $40 million to $42 million a quarter in interest expense, as a portion of our debt is still tied to variable rates.

In the quarter, the non-GAAP tax rate was 29.5%, which is slightly higher than our full-year forecast.

However, we still expect our full-year tax rate to be 29.0%.

Our diluted share count for the quarter was 175.4 million.

Going forward, we still believe that a share count between 176 million and 179 million shares is a good estimate to use.

Our non-GAAP earnings per share were $0.72.

GAAP earnings per share were $0.09, which includes $0.49 per share of acquisition-related amortization expenses; $0.04 per share of non-cash interest expense associated with the adoption of APB 14-1; and $0.10 per share of business integration costs and other expense.

Comparability year-over-year is limited for our GAAP results, due to the merger with Applied Biosystems.

Moving on to the balance sheet and cash flow -- our ending cash and short-term investments were $465 million.

This compares to last quarter's balance of $448 million.

Cash from operating activities was $104 million.

Capital expenditures were $26 million and free cash flow was $78 million.

Our free cash flow was higher than expected in the first quarter as a result of higher income and lower capital expenditures.

Some of this free cash flow was used to fund a small asset purchase to support our benchtop instrument manufacturing capabilities, as well as restructuring expenses.

In addition, we paid off $20 million of debt associated with the Applied Biosystems transaction.

Our ending debt was $3.467 billion.

This balance is made up of our convertible debt of $1.15 billion, and debt taken on for the AB transaction of $2.4 billion.

In addition, this balance includes the impact of the retroactive adoption of APB 14-1, which lowered reported debt by approximately $100 million.

I'll now move on to our outlook for the full-year 2009.

Before I do, let me say that although we are extremely pleased with the strong start to our year, we feel it's premature to change our guidance after only three months of actual results.

Therefore, we expect organic growth for the year to be in the low single digits, and non-GAAP EPS to be in the range of $2.40 to $2.55.

Clearly, with the start that we've had to the year, we now expect to be at the higher end of this range.

As is our practice, I'll also give you a few items to take into consideration for the coming quarter.

Gross margins are expected to be sequentially lower, as price is normally strongest in the first quarter.

In addition, we expect sales of our benchtop instruments and SOLiD systems to continue to ramp up throughout the year, both of which have lower gross margins.

Finally, our 2009 merit increases for employees took effect April 1.

Operating expenses will increase sequentially.

Many of our marketing and R&D programs got off to a slow start this year, as we focused on integration-related activities.

This coming quarter, we will begin spending more in these areas.

And again, the merit increase takes effect.

We expect capital expenditures to ramp up in the remaining quarters and to be in line with our guidance of $175 million to $200 million for the year, including $50 million of integration-related capital.

Free cash flow for the year is expected to be approximately $450 million.

As you might recall, our original forecast for free cash flow this year was in a range of $400 million to $450 million, but with the additional income generated in the first quarter, we feel we are likely to be at the upper end of this range.

As a reminder, this includes an estimated $175 million of one-time cash expenses for the integration.

And with that, I'll now hand the call back over to Amanda to open up the lines for questions.

Amanda?

Thank you, David.

Stacey, you can now open up the lines for questions.

(Operator Instructions).

Quintin Lai, Robert W.

Baird.

Nice quarter.

With respect to the NIH and the stimulus package coming forward, you mentioned increased quote activity, and thank you very much for the expectations for the impact to your business of, what, $100 million.

Did you see any impact in the quarter of researchers perhaps spending more time grant-writing and less time at the bench?

We've heard some of that, of course.

I would say that it had really minimal impact on our business for the quarter.

Okay.

And then what have your sources or contacts been saying about potential in the fiscal 2010 budget for the NIH?

I mean, we've seen some positive things come out this afternoon; I guess we've seen Arlen Specter, who's a big proponent, now switching over to become a Democrat.

What impact do you think 2010 could have for the NIH?

We think 2010 will see a modest increase in the NIH budget, driven primarily because our current estimate is most of the stimulus spending will take place next year.

So I'd say most now of the focuses on the 2011 budget.

And we expect that, and the current dialogue in Washington is, how do we sustain the elevated funding levels that the stimulus will give us in 2010?

So that's where we put our energy in our dialogue with legislators.

And I would say that's where the current discussion is really centered -- is 2011 building off of 2010.

Do you get that feeling, Greg, that this time around, that they're going to try to avoid that dropdown from the last five-year doubling project and continue to grow off of a base of, let's say, 2010-plus stimulus?

Quintin, I think the lessons from the past of the doubling and then not sustaining it are really well-known in Washington.

So that's really I think the most refreshing aspect of the dialogue today.

Secondly, is that there is really an enthusiastic response for the NIH.

And more broadly, just funding innovation at the federal level.

President Obama spoke to the Academy of Sciences and committed to try to get to 3% of the federal budget for the spending of innovation, of which the NIH would be part of it.

So I think we're on a good path.

Nothing's assured, but certainly the tenor of the dialogue has changed considerably just in the last few months here.

So we feel good where the NIH is going.

All right, thank you.

I'll jump back in the queue.

Tycho Peterson, JP Morgan.

Just still wondering if we can get a little bit more color on SOLiD with regards to maybe where some of these placements are going, maybe some breakout from genome centered, non-genome center geographic color.

And then any updates to some of the initiatives you talked about at AGBT in terms of tighter bead packing and progressive mapping and some of these other enhancements?

Yes, Tycho, it's Mark.

So we're seeing good pullthrough on SOLiD and early adoption in smaller centers as well as the larger genome centers.

And that's happening here in the US, we saw good traction also in Europe, as well as in Asia-Pac and Japan, just starting a new fiscal year with funding there.

So we're actually seeing a quite wide distribution.

We focused really this quarter and we were pleased to announce at AGBT both the introduction of SOLiD 3.0 but also then upgrading our customers during this quarter, which as I mentioned, we had 60% done and will complete by the end of this quarter.

And then as the roadmap we outlined, we believe that by just continuing to progress this technology so ever more increasing the technology -- bead packing, as you point to, will increase the throughput by the end of this year to 100 gigs or more.

So we're on that path that will drive a lower cost per run.

And since this marketwe feel as we say just getting going, we're heavily investing to continue to address that, to use the advantage of our accuracy, and then come as well with easier to use workflow systems around that during the year.

And was the growth that you commented on in CE consistent with your expectations or are you seeing an uptick there?

And how do you think about new instrument cycles there in capillary?

So in the field, it was consistent that overall we continue to expect that the movement will go in the research market to next-generation sequencing.

And the growth will happen in more applied -- like forensic, pharmaceutical manufacturing and clinical diagnostic applications.

So we certainly see the room for increased sequencing applications, those applied markets, and consider further offerings and investing in the CE platform to look at further products to really meet the needs of those more regulated and validated customers.

We also see a bit of a trend -- with this interest in sequencing and just across a range of applications, CE continues to be at the moment to be the gold standard of validation of those discoveries.

So you still see a continual use of the in-store base and actually some uptick on further placements in some of the markets of new capacity put in there that we saw during this last quarter.

But overall, the trend continues.

It's a shift in the research to next-generation sequencing and adoption in the applied markets of CE as the gold standard.

Okay.

And maybe just one last one for Greg, when he talked about the growth strategies and personalized medicine and molecular diagnostics, how do we think about the evolution of the sales force going forward?

Do you envision building out a big diagnostic sales force?

How do you think about partnership versus M&A in that space and just your kind of thoughts on building out diagnostics in particular?

Tycho, we've been doing a lot of strategic work on diagnostics and it is one of the key deliverables to the Board this year.

As we've done more and more work, the new Life Technologies Company today does over $300 million a year in OEM provision of our technology.

So we're quite deep already in this space.

In terms of the next step of how do we become perhaps even more of an end solution provider, those strategies are well-thought-through and in the phase now of picking the path to go.

And you'll see us do some things that will center around more R&D, more creation of focused selling forces, and certainly M&A will be part of that as well.

And that all really starts to roll out here over the next 12 months.

Great.

Thanks, and congrats on the quarter.

Ross Muken, Deutsche Bank.

Good afternoon, guys, and congratulations.

On the revenue side, was there any bid on relative to some of the instrumentation particularly that you were surprised by some of the strength?

I mean, these growth numbers are pretty robust relative to just about anything we see in or out of industry.

So I'm just trying to get a sense, versus plan, was there anything that particularly surprised you in kind of its resilience?

Obviously, mass spec is kind of, I think, a notable one, given the performance there based on some of the new instruments.

Yes, Ross, that's a great question.

I would just second your comment about mass spec.

It was a very good quarter for the mass spec business.

I think that 5500 platform technology is being very well accepted and is really providing a stimulus effect to our position, perhaps versus others today in what still is a very difficult market.

I don't want to make any claims other than that; this is a part of our business that has its challenges, but we're very fortunate to have a very good piece of technology out there being sold today.

Maybe, Bernd, you can give any -- some other color commentary on PCR instruments and the like?

Sure.

Hi, Ross, it's Bernd.

On mass spec, certainly the new platform, also some real strength in Asia.

We continue to see the mass spec side.

On the other platforms, real strength, as Mark pointed out earlier, in some of the areas for CE sequencing and certainly the PCR instrument base around the world performed above expectations for the business.

Excellent.

And David, maybe the thought process on keeping the range on guidance.

Obviously, this was quite a strong quarter.

It doesn't seem like we're going to see any incremental weakening in any of the core businesses, at least as strong in the top line.

The synergy capture has been phenomenal.

So I'm just trying to get a sense for -- with respect, I understand this is a difficult environment to forecast, but I know we're going to be at the upper end of the range here, but it seems like with this start to the year, it's kind of hard to get to the upper end of the range.

Well, thanks, Ross.

We are very pleased with the first quarter and hope that it continues.

But it's only three months out of 12.

And we feel that, given the uncertainty in the market environment, it's premature to raise it at this point in time.

Yes, I guess my one question is in the assumptions that you have baked into your model.

Is there anything you would point us to that incrementally, we should be focused on that you're afraid -- not afraid, but that you may see some bit of a disruption?

Or is it just a general macro concern, in terms -- and there's nothing sort of specifically driving that conservativism?

Ross, Greg here.

I would just chime in that, like David said, it's really only been three months.

This next quarter for us, we do a lot of changes to our go-to-market strategy, both with how we present ourselves to customers and then some system changes behind it.

So I think we're just being cautious.

So obviously, if we're able to sustain this performance into the second quarter, we'll be back to you in 90 days with, at that point, probably some revised guidance.

That's really the attitude we have right now towards what we're trying to do.

I appreciate the candidness, Greg.

I just know everyone was thinking the same thing.

Thank you, guys, very much and again, congratulations, great quarter.

Isaac Ro, Leerink Swann.

Just on gross margins, they look pretty good.

Can you maybe help break down for us how the low royalties and how foreign exchange might have offset some of the improvements you made via the emerger synergies?

I'm just trying to get a sense of what the normalized gross margin might look like for the rest of the year.

I think that as we said, I mean, you touched on the point, there were declines in royalty and settlement revenue, but those were offset by gains in pricing, freight optimization and synergies, as well as renegotiation of some sourcing contracts and reduced royalty expenses.

All of those things that we would expect to continue going forward.

So while there may be some increase in expenses next year -- or next quarter and we, in fact, do anticipate that, from increases in merit pay, we don't see that the things that happened to us this quarter were one-time events or any significant changes going forward.

Okay.

And then just switching over to sequencing, I think in the past, you said that you obviously have a very large commitment to that technology, and a large portion of the Company's total R&D is going into that technology.

Can you give me a sense maybe of how your commitment to R&D for sequencing is split up between SOLiD versus perhaps fusion technology?

Yes, Isaac, we're not going to break that out.

I mean, increasingly, we view it as a continuum in the marketplace but also as we organize our R&D effort.

So we're leveraging the experience across that as we develop chemistries and new systems.

And you'll see that in our roadmap -- really our commitment there is to all the technologies.

And really, we see sequencing, different platforms used across different techniques, and so you'll see us continue to invest in CE and SOLiD.

And also we've announced that we always have a single molecule program under development and we're very optimistic about that future as well.

Okay.

And then just lastly on sequencing here -- obviously, Bio Informatics is an area where there's a lot of hurdles that we hear a lot about from current users who are generating perhaps more data than they can handle.

I'm just wondering -- how should we look at this Geospiza partnership with Amazon?

And is that something that you think an accelerated adoption of SOLiD in maybe some of these non-genome center locations?

Or how do we think about helping the informatics part get up the curve?

Yes, the way we've really thought about it is this sequencing technology is really just getting going.

And in order to be able to used ever more in medical environments and clinical settings, we're really trying to test it and give a community of users around that.

So really the partnership is about enabling customers to quickly get on, compare that data and then move on to doing the next experiment.

So you'll see collaborations like that -- collaborations like we announced with the [TGEM] in Phoenix, looking at clinical practice as examples of strategic partnerships we're doing that will help the adoption and grow increasingly in this marketplace of next-generation sequencing.

Okay, great.

Thanks so much.

Jon Wood, Banc of America.

David, can you break out the one-time cash integration costs that were in operating cash flow and the CapEx figures for the quarter?

Jon, this is Amanda.

I can -- we don't have those off the top of our head, but I can do that with you on the follow-up call.

Okay.

And then on pricing, can you give us a sense of the net pricing capture of this quarter?

I don't know if you can break it out from a synergy figure or not, but just give us some qualitative sense on the capture there?

Hi, Jon, this is Bernd.

No, we really don't share those numbers broken down for the quarter.

Is the core business in line with historical capture rates in prior years?

Yes, Jon.

This is Amanda.

It is.

Thank you.

Derik De Bruin, UBS.

In the Cell Cultures Systems business, certainly some of the recent reports from the biotechs suggests that some of the biologic drug volumes are down, particularly impacted by the economy.

Are you seeing any changes in terms of drug inventories, the demand for manufacturing on your industrial cell culture business?

Yes, Derik, this is Mark.

So, typically, what we're seeing is customers in this area [have] had a slightly reduced demand.

That was something we saw at the end of last year; so as we came into planning for this year, that was really how we planned it for this year.

So, the demand, while it continues, we sort of planned for that; it's nothing different to our expectations.

And as we go through the year, we'll continue to really see still a macroeconomic trend of moving towards more biological molecules, but aware that you're going to see some failures and some consolidation in the Pharma industry that is anticipated in our plans here.

Just as I said, as the companies have gotten surprised, you've see no incremental pullback in requests for orders from your industrial side?

No, it's as we anticipated -- a tough environment for the Pharma, but no dramatic change to what we've anticipated for the year.

Great.

I guess -- could you talk a little bit about your pullthrough on reagents per SOLiD system?

I mean, where are you -- how many of your customers are fully ramped?

What's the average conceivable pullthrough?

Well, this quarter was different as we upgraded a lot of our customers from 2.0 to 3.0.

That's a major upgrade.

It typically takes about two weeks to do that upgrade.

We still expected our customers to ramp up to 3.0.

They'll be in the range of somewhere between $175,000 to $200,000 per system.

Okay, great.

I know you took a US price increase in January; you took a European price increase in February; you're going to do -- I think you're going to do Asia this quarter.

I guess, have you seen any of these push back and people, I guess, wanting to carry less inventory?

I guess could you talk about what you're looking down through the pricing environment?

In general, as the earlier comment we had -- this is Bernd -- we had been fairly sensitive this year on making sure that we do look at the market and the environment we find ourselves in; but pricing has been in line with our expectations really pretty much around the world.

As far as the specific comment around people destocking inventory, our portfolio really -- we don't have that much of stock sitting with our customers.

Our products are fairly time-sensitive and people order them on a regular basis.

And so we really haven't seen any impact on our business as it relates to some of the destocking comments we may have heard in other parts of the industry.

Great.

And -- actually I'll get back in the queue.

Thanks.

Doug Schenkel, Cowen and Company.

Thanks for taking my questions.

Let me just start with another pricing question, and I apologize if I missed this in your prepared remarks -- but would you be willing to comment on where you are in applying some of the traditionally strong Invitrogen pricing discipline to the ABI businesses?

You know, I would just say that in that area, where we've made some good initial progress but we're really just at the beginning of the journey on overall pricing excellence for the combined Company.

Okay.

And maybe if I could just rattle through a few housekeeping items.

Regarding the $9 million in deferred services revenue that you're recording on a non-GAAP basis, did you receive payment for those services in the quarter?

And then how should we think about that over the balance of the year?

Yes, we received payment.

And so, as a matter of fact, we received payment when we entered into the service agreements.

So what we're really doing here is matching the recognition of the revenue as the service agreements expire or we incur the expenses to provide those services.

So I think you can expect about that level of $9 million to $10 million in terms of revenue going forward per quarter.

Per quarter?

Okay.

And then within molecular biology, would you be willing to quantify how real-time PCR held up in the quarter?

Well, we don't break out specifics in real-time PCR but it continues to be a strong business for us.

I mean, the real-time PCR, just as a gold standard for validation and increasingly into these applied markets in diagnostics.

As Bernd said, it was part of the strength of the instrumentation, but just it was strong for us across the board there.

Okay.

So last year, you did quarter-by-quarter somewhere between close to 6% and as high as 10%.

Would it be fair to say that there was no notable change in that range in this quarter?

I don't think you can compare like-by-like categories, because there was slightly different categories then that you've got.

So you've really got to look at the overall category.

This is a category, in fact, the business, we've said, Molecular Biology Systems is a mid-single digit grower that we expect to go.

It's got big portfolio products in it, including real-time PCR, which is, obviously, part of the growth engine.

Okay.

And then last one -- I believe, at least at the time of your Q4 call, you had talked about -- I think it was about $1 billion of the $2.4 billion of then-new debt that was swapped into fixed rate.

Any further changes on that front?

No, you're absolutely right.

Of the $2.4 billion, we swapped $1 billion to fixed in January at about a 2% swap rate.

Okay.

Thanks again for taking the questions.

Stacey, we probably have time for one or two more questions.

Marshall Urist, Morgan Stanley.

A couple of questions.

The first one, can you talk about -- it was a pretty strong number for EU growth.

We've heard of this from several companies and contrasting to what's going on in the Americas.

So could you talk a little bit about what's driving that?

Is it different end markets or product cycles there, why we're seeing such a difference?

Hi, Marshall, it's Bernd.

The EU growth really kept on the same trajectory we saw pretty much through 2008 and really not a major funding arenas, where we've positioned most of our portfolio, have changed.

In Europe, there's no doubt there's less of a business for us in the biotech area.

It's more academically focused and it's something that's just stayed incredibly strong, certainly through the first quarter.

Okay, great, thanks.

And then next question, can you give us a little more granularity on how your Pharma business did?

I know you said it was weak, but could you help us to quantify that a little bit more?

Was it sort of a low single-digit number?

Or how did that do through the quarter?

Because obviously it's been a concern for a lot of people.

Yes, we don't break that out specifically; but I think in your prepared remarks, we spoke to that Pharma and biotech in general, especially large Pharma and biotech, which is the majority of our revenue in that area, continued to not be that robust.

Okay.

And then last question -- and I apologize if this was asked before, but what was the price contribution to constant currency growth in the quarter?

We don't break it out on a quarterly basis.

Okay, great.

Thanks, guys.

All right, Stacey.

That will wrap up our Q&A portion of the call.

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