Waters Corp (WAT) 2003 Q4 法說會逐字稿

Welcome to the Waters Corporation fourth quarter financial results conference call. All participants will be on listen only until the question and answer session. This conference is being recorded. If anyone has any objections please disconnect at this time. I would like introduce your host for today's call, Mr. Doug Berthiaume, Chairman, President and CEO of Waters Corporation. Sir, you may begin.

Thank you. Good morning and welcome to the Waters Corporation fourth quarter conference call. With me on today's call is John Ornell, Waters CFO, John Nelson, the company's CTO, and Jean Cassis, the VP of IR. As is our normal practice I will first cover the fourth quarter results. John Ornell will then take you through the financial details and then layout or 2004 financial outlook for you. And then finally we will open it up for the Q&A. Before I begin I would like John to cover the cautionary language, if he would.

During the course of this conference call we may make various forward-looking statements regarding future events or future financial performance of the company. In particular we will provide guidance regarding possible future income statement results of the company, this time for Q1 and full year 2004. We caution you that all such statements are only predictions and that actual events or results may differ materially. For a detailed discussion of some of the risks and contingencies that could cause our actual performance to differ significantly from our present expectations see our 10k annual report for the fiscal year ended December 31, 2002, in part one under the caption business risk factors. We further caution that the company does not obligate or commit itself by providing this guidance to update predictions. We do not plan to update predictions regarding possible future income statement results except during our regularly scheduled quarterly earnings release conference calls and webcasts. The next earnings release call and webcast is currently plan for April, 2004.

Thank you,. Our fourth quarter results in total came in very close to our expectations with about $275 million of revenue and operating earnings per share at 48 cents per share. That resulted in earnings being up 17% over the same quarter last year in 2003. The dynamics within product lines and geographies, however, varied from our original expectations.

On the disappointing side of the ledger our mass spectrometry product revenue came in weaker than we expected. The principle area of shortfall was in [prodiomics] with our product line and the original forecast for mass spec for the quarter we thought was achievable because it called for revenues to decline quarter over quarter in the mid-teens. The end results revenues in organic turns were down about 30%. Some of this resulted from weaker magnetic sector sales in the environmental market in Japan and some was unforeseen weakness in Asia as we converted over from Micromass distributor network to Waters subsidiaries and saw some business delays as a result. But in the end of biggest effect was slow business in prodiomics application. We did see a pick up in our triple quad sales activity as activity for the new Quattro premium has built however, we still believe that we haven't seen this productibility to its full potential yet. We are optimistic that with mass spec organization changes now fully behind us, we have good clarity entering the year on the good product front and now having anniversaried the 2003 soft results we are in good shape to grow this product segment in 2004.

HPLC product results in the fourth quarter were very encouraging. The last time we spoke I indicated that in the third quarter and the early part of the fourth we had seen some encouraging signs of potential improvements in HPLC, particularly from the pharmaceutical market, but it was then too early to be certain that it would continue. While I am pleased to report that the full fourth quarter reinforced those early indications and HPLC grew 10% organically during the fourth quarter, even more encouraging was the breadth of the product of the strength across geographies and product lines. The pharmaceutical market in both the U.S. and Europe recovered and produced double-digit growth, and Asia continued to deliver similar results. Our data products, particularly our strategic network data products, grew much stronger than the average this market segment is signaling good, strong fundamentals for 2004. Our HPLC chemical consumables products wrapped up a very successful year with good strong double-digit growth performance and in likewise fashion the service and support products grew about 10%. University, government and industrial customers were the weaker areas for HPLC demand this quarter. Our T. A. Instruments business had another solid quarter with core product revenues up 10%, and good strong performance across geographies and product segments.

On the strategic front I hope you've seen the press release that we put out yesterday where we announced the pending acquisition of NuGenesis. As you may recall I have informed you in the past of our long-term strategic interest in developing a broader data and software platforms that extends beyond our traditional HPLC data management and control products into the total scientific data management arena. Our first step in that direction was the acquisition last year of Creon with its solid position in Europe and we have now followed that with the unquestioned market leader in the field of scientific data management, NuGenesis. This is a very exciting investment for us as it opens up a large potential market, albeit a market that is just now really developing. There is also an area where large pharmaceuticals customers were reluctant to commit strategic resources to a small start up company with no global brand or worldwide capabilities. We are confident that this business can leverage Waters worldwide competitive strength and can grow quite robustly.

As we enter 2004 I'm also encouraged by how well we are positioned on the core product front. Although it has taken us awhile to work through the mass spectrometry strategic product and organizational issues these problems are now largely behind us and I believe we are now in good shape to deliver solid performance for 2004. We will have the new Quattro premier and the new LC T premium for the full year and we anticipate launching our next generation Q-Tof at the ASMS conference in June.

In HPLC we are clearly excited about our expanding data and software platforms and our fundamentally strong positions in chemistry consumables and service and support revenues. But the most exciting development in HPLC is in the instrument product category. At [Pitcon] in March we will introduce our first major new chromatography platform since the alliance system in 1996. This new system pushes the performance frontier of chromatography to new levels by delivering a new system with a novel new separations chemistry [inaudible] and which we believe will be particularly effective in conjunction with Mass spectrometry detection. This system will not obsolete our alliance systems but will serve to rebuild the market and open up new application. It also provides an opportunity to create a proprietary consumable stream as part of the system design. We invite you to the unveiling of this new chromatography system at the Pittsburgh conference in Chicago in March.

In summary, we are pretty optimistic about 2004. Granted we still have to delivered improved mass spectrometry results but we think with the anniversary most of the tough comparisons and are in good shape to deliver in 2004. An improving pharmaceutical market should help with Mass spec, as well as with our HPLC products, where we have a dynamic data and software opportunity as well as an exciting new differentiated chromatography system to sell. In our T. A. Instruments business also continues to deliver good solid double-digit top and bottom line results. When you combine these fundamentals with a favorable foreign currency climate and our ability to utilize our strong free cash flow to leverage our results we should be able to deliver superior financial performance in 2004. Now I would like to turn it over to John for the financial discussions.

Thank you, Doug, and good morning.

Financial results for the fourth quarter were at the higher end of our expectations with pro forma earnings per diluted share of 48 cents for the quarter versus 41 cents for the fourth quarter of 2003 before unusual charges of 17%. On a GAAP basis earnings per share were 47 cents they are quarter, versus 30 cents for fourth quarter 2002. Sales grew 7% this quarter on a reported basis which includes continued benefit from favorable foreign currency. Sales of HPLC products grew faster than expected at 10% in constant currency terms. This growth was consistently strong throughout the quarter as large pharmaceuticals customers returned to more normal levels of instrument purchases. Our Mass Spectrometry product shipments declined this quarter, adjusted for the sale of the inorganic Mass Spectrometry product line earlier this year, Mass Spectrometry sales were down about 30%.

With the addition of the new Quattro premiere we were able to grow Mass Spectrometry sales marginally versus our third quarter sales but the continued weakness in the market made the year over year comparisons quite unfavorable. Our thermal analysis business continued its positive performance with growth of about 30% this quarter which includes the acquired products from the [Reametrics] acquisition earlier this year. With the help of [Reametric] products T.A. Instruments sales increased about 10%. Foreign currency added 7 percent, seven-points of growth to reported sales this quarter.

Gross margin improved this quarter buy about 120 basis points over Q4 last year with most of the improvement related to foreign exchange. SG&A overall was up 7% due to the heavy impact of foreign currency translation. R&D increased 25% this quarter, a rate substantially higher than normal, resulting from a $1.8 million contract R&D expense related to new product development efforts for our Q-Tof product. These costs are largely behind us and we do not expect similar increases in 2004.

Our effective tax rate remains at 23% this quarter on a pro forma basis. On a GAAP basis the rate is slightly higher due to the non-deductibility of the additional IP R&D expense taken this quarter relating to the Creon acquisition.

Looking at our share buy-back program we acquired about 2.3 million shares in the fourth quarter for $73 million. Earlier in 2003 we concluded our original $200 million program in the first quarter with the purchase of 4.3 million shares for $100 million. Then in the second quarter our Board of Directors authorized a 400 million, two-year program, which we have been executing for the past three quarters. For 2003 we have purchased 11.9 million shares for $325 million. We enter 2004 with $176 million of repurchases remaining in the program.

Our strong cash flow continues this quarter with the generation of $81 million of free cash in the quarter, bringing full year free cash to $202 million before considering litigation payments. Litigation payments reduced free cash flow to $142 million for 2003. This result is better than our recent expectation and even tops our record from prior year where free cash was $192 million. An unexpected collections and reduced capital expenditures among other factors resulted in the exceptional Q4 performance.

Accounts receivable days sales outstanding stood at 71 days this quarter, down from third quarter and flat with Q4 '02. Adjusting for currency effects, DSO improved this quarter buy about two days versus last year.

Turning to 2004 and before considering the NuGenesis transaction we are planning on sales growth of about seven to 8% before currency impacts. This growth anticipates continued improved demand from our pharmaceutical customers and the impact from significant new product watches. Our on a product line basis we expect HPLC to grow in the high single digits, T.A. to grow in the high sing deputies and Mass Spec to grow in the high single digits for the year. Further we expect foreign currency translation to add 2% to this growth rate is the you're wrote average is 120 and the Yen 106 for the full year bringing our overall sales growth expectation from 9 to 10% for 2004 on a record reported basis. At this sales level we expect operating margins to improved by 60 to 80 basis points reflecting both improved gross margin and operating leverage with SG&A and R&D expenses growing less than sales.

At this point I would like to talk briefly about two events that will impact our operating expenses this year. The first is a modest reduction in work force that occurred earlier this month and is expected to provide for $5 million reduction in spending this year and will result in a charge in the first quarter. The second event is a change in our Mass Spectrometry sales and service strategy in select Asian markets. In these markets we are moving from a distributor model to a direct sales model. The impact of this change is expected to increase our selling and service expenses by $5 million with an equal, with an offsetting equal increase to sales. While a percentage increase in sales growth is negligible, the increase to SG&A represents about a 2% increase over 2003. Both of these events are incorporated in our expected operating margin improvement of 60 to 80 basis points.

Net interest income is expected to decline by 2 to 3 million this year as we continue the stock buy back program. Our effective tax rate looks to improve this year as a result of successful tax planning activities including the result of increased production at our Irish facility. We expect an effective tax rate of 22% for 2004 and beyond. Weighted-average share count is expected to decline by about 4% this year. Now layering on the NuGenesis acquisition we would expect this acquisition to add around $25 million to sales in 2004 and largely break even before considering acquisition charges. Putting all of this together, our current expectation for earnings per fully diluted share for 2004 is $1.68 within a normal 4 to 8 cents tolerance for the year and before one time charges. Free cash flow is expected to exceed 200 million for the year.

Regarding Q1 of 2004 we expect organic sales growth of around 3% with foreign currency translation adding approximately 5% to growth for the quarter. This sales growth assumes continued strong high single-digit o organic growth rates, HPLC and more typical mid-single digit growth for T. A. Instruments as [Reometric] Scientific acquisition is annualized. While business momentum in Mass Spectrometry is improving we expect sales to decline in comparison to a relatively strong first quarter in 2003. Our full year Mass Spec outlook is more favorable and we expect sales to accelerate to a mid-teen rate throughout the remainder of the year as the Quattro premiere shipments accelerate, quarterly comparisons become more favorable and new products gain traction. Additionally, sales should increase in the first quarter as a result of the NuGenesis transaction, the amount of which will vary based on the timing of the formal closing. With these sales assumptions for the first quarter earnings per fully diluted share are projected to be 34 cents this quarter with the normal 1 to 2 cents tolerance and before one time charges.

Doug?

Thanks, John. At this point I think we can open it up for Q&A.

Thank you. We will now begin the question and answer session. If you would like to ask a question please press star one. To withdrawal your question you may press star two. Once again to ask a question press star one. Our first question comes from Darryl Pardi with Merrill Lynch.

Good morning, guys. Could you give us a breakdown, you've done before, of Mass Spec just by group, by Triple Quad, Q-Tof and the other category?

Jean, want to take them through how we are characterizing our Mass Spec business right now?

Yeah. If you take a look at the latest results the Triple Quad business makes up approximately half of our Mass Spectrometry with other categories of Mass Spectrometry including Q-Tof and Time of Flight instruments magnetic sectors making up the other 50%.

Okay. And Triple Quad, could you give us an indicate of how Triple Quad sales were in the quarter year over year?

If you look at the 30% down you understand that we talked about, the problem was in the basically sectors and Q-Tof's that 30% rate. The triple quads group didn't perform anywhere near as poorly. And the reason for the decline was really more of a [prodiomics] base than it was a discover of research area related to the Triple Quad application.

And-- I know you had some growth in the Triple Quad last quarter?

Quarter over quarter we had growth in the Triple Quad. That was not the case with Q-Tof but the real dilemma was versus Q4 of 2002 we had a relatively strong Q-Tof comparisons that made this quarter look as bad as it did.

On the Quattro Premiere expectations were for $5 to $10 million in revenue this year. Where did that fall?

We came in somewhere I think around 7, 7 to 8 net range for the combination of the third and fourth quarter.

Thanks, guys.

Your next question comes from Larry Neibor with Baird.

Thank you. Good morning. How would you characterize the state of the Mass Spec market and what you would expect for 2004 overall?

Well, Larry, it's somewhat colored by what's going on and fairly unique to us as opposed to what's going on totally in the marketplace. I think, certainly what's happened with us is that 2003 was clearly a transition year. We reorganized our Mass Spec activities. We consolidated sales forces. We've gone from a micro mass approach of using distributors and Asia and Latin America to incorporated all that business into our subsidiary network. So all of that kind of created change in our world. We had an introduction of the new Quattro Premiere but it happened late in the year and we are looking forward to introducing a new Q-Tof at ASMS this year. We think that there was pretty clearly a slow down in the [prodiomics] market in 2003. Now we were a big piece of that because of our Q-Tof dynamics but we think that's probably true across the market. We were weaker than probably most in the marketplace but we think the marketplace was clearly less robust than it has been. We think that the Triple Quad market is still pretty strong. We think the Single Quad market was weak this year. It was weak for us. And that's largely a function of slower investments in pharmaceutical discovery applications. We see some signs of improvement there in the fourth quarter and we are predicting a better marketplace there in 2004. Does that cover it?

Yeah, one additional question, please. I think you said that your success in the HPLC market came despite weak industrial sales in the quarter, it was carried by pharmaceutical.

Our industry customer, industrial accounts in HPLC make up something less than 20% of our total revenue. So that segment, and these are the Dows., DuPont, chemical sector of the marketplace.

Are you expecting a rebound in '04 there?

We are expecting it to be a little bit better but we never model that segment of the industry, that segment of our marketplace to be double digits. We pretty much model that to be in the mid single digits and that would be our expectation for '04.

Thank you very much .

David Zimbalist with Laylock Partners.

First of all can you talk a little bit about this transition in Asia. I thought that some of those transitions in your Mass Spec selling had taken place earlier this year. Can you talk a bit about the process and what happened in the fourth quarter versus the prior quarters? And then I have a follow up.

Sure, David. The transition in our selling activities essentially took place everywhere else except Asia earlier in the year, with a few exceptions like the east block which we are still working our way, the former east block. But Asia including Japan, that being Japan, Taiwan, China, Australia, where Waters has always been a direct activity, Micro Mass has traditionally used independent distributors and agents. And it's taken us awhile to actually work through the transition with those agents, determine whether any of those people wanted to join Waters or whether we were going to have to rehire or find new people to go direct in those areas of the world. And that's, that's largely in process in the fourth quarter with that still continuing as we move into the first quarter of '04.

Okay. Then can you talk a little bit about HPLC? You talked about having a very good consistent fourth quarter. Was there any activity at your customers that let you feel that that is something that's like to the continue into next year as opposed to being something akin to a budget flush that just got released earlier in the year?

Yeah, I think that's a fair question. And, of course, as we kind of finalize our budgets for '04 that's pretty clearly on our mind. We are pretty confident that what we are seeing in the fourth quarter is, the 2004 budgets for these key accounts are consistent with what we saw in the fourth quarter, that at least as they go into 2004 as we've triangulated it in multiple directions and as we've seen early 2004 activity take shape, that the '04 expectations for these large key accounts is consistent with what we saw in the fourth quarter. That's not to say those accounts can't change and can't lock down but it would be unusual, we believe, and we've explored this with many of these accounts, for them to open up their investment practices for just a short period, i.e., the fourth quarter, and then go back to lock down in the early part of 2004. That seems to be a consistent reading we are getting across the accounts and across geographies. So we are still not taking it all to the bank, as you can probably tell in our expectation, but we are certainly more optimistic at this time going into '04 than we were at a similar point going into '03 okay? Hello?

Sara Michelmore with SG Cowen, you may ask your question.

Just at forecast for '04 on the Mass Spec mid single-digit growth, can you just give us a sense of how that breaks out relative to the Triple Quad business?

I'm sorry, Sara, you said as it relates to '04 single-digit growth from mass suspect?

What you quoted was mid single-digit growth for Mass Spec for the full year.

That was for T.A. Instruments. Mass Spectrometry we said would be high single-digit.

High single, I'm sorry. Can you give us an idea of what your assumptions are there for the triple quad business versus the other businesses?

Roughly we are looking for the Q-Tof related business to move up in the neighborhood of 10% triples the same thing although there's more upside in that business, and the other category to be closer to a 5% area. So that would get to you high single digits in total for the year.

It sounds like the Q-Tof business has had a tough time the last couple quarters. What really drivers that acceleration?

The launch of the new, a couple things drive it. The first thing is we have been disadvantaged because we haven't had the latest generation technology of Q-Tof in our largest market segment. We are going to fix that with a new generation Q-Tof launch this year. But at the same time we are improving the front end of the system in both chromatography and software, we think some pretty novel capabilities. And we think combined with the new generation of Q-Tof you are going to see essentially a new prodiomics system capability from us that will answer a number of issues that we've had in the marketplace at a very competitive price point for the customer.

So you are really depending on the new products as opposed to kind of increase in underlying demand? Or you are counting on the new products to drive an increase in the underlying demand?

I would say that we don't think as we have seen it that the marketplace can get much worse. But we think we can achieve these kinds of revenues with the product configuration that we will have available in '04.

Just a quick follow on to that, then. You are showing the new chromatography platform at Pitcon, and the new Q-Tof at ASMS, what really are you talking about in terms of production launch for those products?

Our plan is to ship the new chromatography system in late in the second quarter, and the new Q-Tof system in the third quarter.

Great. Thank you.

Darryl Pardi with Merrill Lynch. You may ask your question.

Hey, guys, a follow up. You ended the year $357 million in cash and you paid down some of the short term notes that you guys had. Just looking over the next year, I know you said you will continue the share repurchase program. But with the shares where they are now what are your ideal uses for cash? Are you seeing a better pipeline of acquisitions out there, would you consider paying a one time dividend or distributing that cash in some other way to the shareholders?

Well, we continue to look at things and as NuGenesis is in the $45 million range use of cash, we see opportunities like that and so we think we will be evaluating more of those as time goes on. That doesn't eat up a full years cash flow, obviously. There are we think fewer opportunities that we are ready to say are right in front of us for larger acquisitions. Those aren't impossible but we don't see them happening right now. So if we don't see other investment opportunities then our current mode of operation would be to continue to consider stock buy back. But I will say that it is on the agenda for board consideration this year to evaluate that dividend and what our dividend policy should be. That shouldn't be taken as, we are going to institute one or not, it's just that with the changes in the tax laws there is, the playing field has been leveled somewhat. Our bias is still probably to return capital if we don't have other uses for it through stock buybacks, even at the current price we are not disinclined to do stock buybacks. But there clearly is more attention in the marketplace and within the company as to whether a dividend makes sense as we look at our long-term cash generation capabilities. So it is on the agenda but we are not prepared to lean one way or the other right now.

Okay. Thanks.

Bob Little with M.D. Staff Investor Service.

Two quick questions. Can you quantify the impact fourth quarter on years revenue growth from acquisitions?

Let me take a shot at it and then John because I think the net result in the fourth quarter is kind of a push because we had our inorganic product line that we sold and so that is going one way and then riometrics was the product line that was purchased and then Creon that was purchased, the net/net was probably a couple million dollars, net favorable. So it's kind of diminimus in the quarter.

And in the year.

I think the year is about the same dynamics, it terms of percentage growth.

And the second question is, could you quantify the impact on the full years revenue growth rate from foreign currency?

Foreign currency full year is about six-point.

Thanks very much .

Derik deBruin with UBS.

Good morning. Could you give us more color on the NuGenesis acquisitions, what the operating margins and gross margins were for that?

Actually, no, I can't. We are not prepared to layout the actual details of that P&L at this time. But as it relates to the NuGenesis products and business opportunity where Waters has traditionally played and the market leader in the field of chromatography data systems both for the control of HPLCs as well as for data archive and analysis. There is a growing need particularly in pharmaceutical companies, related to both a number of dynamics one of which is the regulatory environment with 20 part 11 requirements for electronic data records and retention, that they look at all of the data produced in their analytical laboratory and have validated protocals for archiving, manipulating, backing up, storing, and providing it to their researchers and managers in a usable fashion. As you can imagine this is a pretty significant challenge in these accounts where they are getting data produced from any number of scientific instruments and with different needs on the part of various users to access and manipulate that data.

Okay thank. A question on your HPLC products. So if the prodiomics market for Mass Specs instruments is weak, does this imply that sales for HPLC instruments for prodiomics are also weak and if so what applications do you have for driving growth?

I certainly for us I think it's fair to say that most of our prodiomics Mass Specs came with a Waters HPLC on the front end. But the HPLC piece of that marketplace is not a significant piece of the overall 2.5 to $3 billion HPLC marketplace. So, yes, it is fair to say that it was weaker for us but it's dwarfed by the classical pharmaceutical marketplace.

That's helpful. One final question on HPLC. What features are your new HPLC products that you are producing at [Pitcon] have that will prevent cannibalization of the older alliance product line?

I think the principal way to think about it is this system is built on novel and proprietary separation chemistry, and it was starting with this novel capability and then developing a system around it so that the net result of which is finer, faster, better more sensitive separations, significantly better, we think. And that as a result in introducing this it's not going to be easy for our competitors to backward engineer or to introduce on a time frame with ours a system that competes with this capability. Now when I talk about a proprietary chemistry I'm not saying that forever and every no one will be able to provide a chemistry that competes with ours. But I think compared to the traditional open system model in HPLC this, certainly for some period of time, has the opportunity to be much tighter kind of razor and razor blade model in this systems configuration. That's where we believe that we have some very real opportunities in 2004.

Okay. But so is it safe to say that the new product line then has certain types of chemistry associated that will not replace what you have in some of your older products so you are going to prevent those from being cannibalized?

Yes. We don't think that this will directly cannibalize our alliance systems. Frankly our thinking has evolved a little bit. If you had originally we thought that this new system was going to be substantially within the very high value-added, high sensitivity applications for HPLC. And we still think that that's going to be a very attractive slot for this system and will traditionally be paired with a mass spectrometer in those applications so it will be a high value-added system. However the more we expose the capabilities of this system to our Beta sites and to our customers, in particularly the pharmaceutical industry, the enthusiasm for this cross applications has been very high. So it's possible that this will penetrate more into what we call more traditional HPLC applications but we are not currently modeling that that's going to happen quickly in 2004. The net/net result of either of those is favorable to our overall growth and profitability.

Great. Thank you very much.

You're welcome.

Michael Peterson with JP Morgan.

Can you give us an idea on what you think Creon could do in revenues this year?

We are looking at Creon moving up in probably $14, $15 million in revenues in '04.

Can you give us an idea of some the trends you are seeing in Japan. I know we heard from other companies that there's a bit of a pause in spending due to the shift in funding.

We are very enthusiastic, certainly in our traditional HPLC market in Japan. We see no slow down in our business. It's been double-digit business for us for awhile and we think, if anything we actually see some near term strengthening in the Japanese market. The Mass Spec world we've got our business really shifting and moving from distributors to in-house, so the pace of that, I will put aside. But the HPLC market for us looks very good. Okay.

Thank you.

Steve Unger with Bear Stearns.

Just a quick follow up on Derik's question. Did I hear you correctly that you were going to be introducing a proprietary consumables for the new product, specifically proprietary columns?

Yes.

Can you elaborate on, is there an opportunity for, or is that technology going to be available to other vendors to provide columns as well or is that something you are thinking something more in line with more of a closed system?

Well, it's a fair question. I would say right now it's a proprietary chemistry. Now let me elaborate in that you can use conventional chemistries with this new hardware and software platform but you won't get optimized performance. Will you get good performance but you won't get optimized performance. By using our proprietary chemistry you'll get substantially better performance. And our question in the long run is, will we license or make that chemistry available to others and that's a subject under discussion right now.

Great. Then just two quick housekeeping items. One, what was the total debt level at the end of the quarter, both short and long-term debt? And then what is NuGenesis revenue model, is that a license model or is that a subscription model?

The debt is in short term long-term notes of about 260, the debt. You want to talk to NuGenesis?

Yeah, NuGenesis is principally a license model. Although there are revenues, there are consulting and service revenues that go along which kind of traditional in those software applications. But principally licensing.

Great. Thank you.

David Zimbalist with Laylock Partners.

Three quick follow-ups. Can you talk about the HPLC business you had this quarter, if you have a sense to whether or not that's mostly replacement business or whether you are seeing build out from the customers. Second in terms of follow that up with your new product, in a way you've got more interest amongst the customers who have seen it for broader applications. Do you expect that there will be any slow down given that you are launching it at Pitcon but not actually shipping to late in the second quarter that your first quarter May actually have some sort of pause affect as customers look to evaluate whether or not they want to uses this more broadly? And then finally on accounting does NuGenesis book the licenses on a one time revenue or do they amortize the license over the life of the license?

As relates to NuGenesis accounting, the typical sales is an outright sale; one time license fee. I wouldn't say they don't totally.

There could be maintenance associated with it as well but there's a licensed sale along with typically consulting work as well that goes with that. And then after that people are typically buying other seats for a particular price and then there's maintenance to the extent they want to take that going for.

The maintenance is annual.

Whether it be amortized over the 12 months.

Okay.

As relates to the impact that the new system might have on alliance sales, it's maybe why we are a little bit cautious about our first quarter. But frankly we don't think it's going to have a significant impact. I think until this system really gets demoed in these accounts and they really begin to solve a few within their own systems it's not likely that you are going to see a significant move forward. And the people that we are talking to, while it's encouraging that they are so enthused about this system in their core activities, we are frankly skeptical as to whether they are going to make wholesale moves into those applications very quickly. So if they do the net results for us will be strategically very, very strong because we have such a strong proprietary position in that field. But I frankly think that that enthusiasm isn't going to be manifested in those core applications all that early and you will see alliance really retain its position there.

Okay. And this quarters strong HPLC, was it primarily replacement business or are we talking about build outs and in the same context actually if you can talk a little bit about pharma versus sort of more traditional younger bio tech companies?

I think certain what will we saw in big pharma throughout most of '03 were delays in projects and that was delays in new projects. It was certainly slow conditions in early stage discovery applications. And it was frankly longing out the replacement cycle. Not unlike what we saw in 93, 94 time frame, when a number of those accounts delayed replacement cycles in our product lines in particular. Then you saw them get through the healthcare concerns that they had in the late 94 time frame and we saw our business be favorably affected by the pent up replacement demand that had built up in those accounts. We think that that's possible in the '04, '05 time frame, too, but we are not taking it to the bank with this revenue outlook. So in the fourth quarter we saw a number of those dynamics play themselves out. We saw some pent up replacement demand begin where accounts had told us earlier in the year that they had to replace existing systems but they had pushed it off and pushed it off. And we also saw new projects begin to come into play. I'd say the other thing that we saw in '03 was that the effect of some of the large pharmaceutical mergers took longer to make their way through those accounts than we had anticipated. And we had specific evidence of some of that where we had been told three quarters ago that the project was coming but they had to work their way through new organization structures and what have you, I'd say that took longer than we had anticipated and, in fact, they had anticipated. So we saw some of that in the fourth quarter also.

Okay.

Larry Neibor with Baird.

Do you anticipate your new HPLC platform to have a premium price point compared to the alliance family? And secondly what impact on margins will the increased sales of the proprietary chemistry have for you?

Yes, it will have a premium price, Larry. You should think of that premium price as being 20 to 25%. And the chemistry will also have a premium. But in the chemistry area our kept treatment products have very good margins; our chemistry. So while these will have higher margins it's a little bit higher than area very good, strong margins. So I wouldn't suggest that you ought to model anything unusually different.

Thanks. One additional question on the Mass Spec side, you are taking a strong system approach offering, a complete system instead of just instruments. Your competitors for the most part are offering just instruments. Do you feel that your instruments will be able to perform on a stand alone basis or do they need to be wrapped around the software in the HPLC also?

Well, in all of our systems we have development plans that try to take advantage of our strength to put together the best components that we can to deliver the best performance. But clearly we think one of the advantages that we have over many people in our industry is that we have a greater systems capability. We have much stronger software and systems capabilities, we think, than anyone. We certainly have a market leadership position in both HPLC and Mass Spectrometry that no one else in the industry can claim at the level that we can. And so we think it would be silly not to take advantage of those strengths and result in a way of analyzing samples that samples that take advantage of all those strengths and produce the best results. But, I think we are going to have the best chromatography elements of that, the best software elements of that, and the best Mass Spectrometry, too, that will come together. So, yes, we've had some very well documented issues in our Mass Sspectrometry product lines related to the patent case that we've had to work ourselves through. We think we understand those. We think we have now, in the development cycle anniversaried those issues and we are pretty optimistic as we go forward from here.

Great. Thank you.

At this time there are nor further questions.

Okay. Very good. Well, thank you all for listening and we will see you at our first quarter conference call. Have a good day.