Waters Corp (WAT) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you so much for standing by. Welcome to the Waters Corporation third-quarter financial results conference call. (OPERATOR INSTRUCTIONS) Also, the call is being recorded. If you have any objections you may disconnect at this time. Now I would like to turn the call over to your conference speaker, Mr. Douglas Berthiaume. Sir, you may begin.

Good morning and welcome to the Waters Corporation third-quarter financial results conference call. Let me apologize a little for a little bit late start this morning.

With me on today's call is John Ornell, Waters' Chief Financial Officer; Gene Cassis, the Vice President of Investor Relations. As is our normal practice, I will provide an overview of the third-quarter results, and then John will take you through the financial details, and he will lay out the fourth-quarter outlook for you. Finally, we will open it up for Q&A. But before I begin I'd like to John to cover the cautionary language, please John.

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 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 10-K Annual Report for the fiscal year ended December 31, 2003 in Part 1 under the caption "Business Risk Factors".

We further caution you 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 webcast. The next earnings release call and webcast is currently planned for January 2005. Doug?

Thank you, John.

Well, the positive momentum that we saw in the first half with improved pharmaceutical and industrial demand continued to benefit our third-quarter results. Overall our sales growth before currency effects came in at 11 percent. Favorable currency exchange rates added another 4 percent to bring reported revenue growth to 15 percent. Earnings per share grew even faster, almost double the sales growth.

Geographically, sales in Europe have improved from the softer conditions we witnessed last quarter. But Asia and the US still showed the strongest growth, while weak governmental spending depressed sales in Canada.

From a product line perspective, and on a constant currency basis, our chromatography business continued to perform well with sales growth at 10 percent. Shipments of our new ACQUITY UPLC system were on our expectations, and ACQUITY will continue to positively impact our sales trend as demand accelerates. I will provide a little more detail on ACQUITY a little bit later on.

Mass spectrometry sales were up about 5 present -- again, that's in local currency -- in the third quarter. And that was a little lower than we had originally expected. But (technical difficulty) signs here are pretty encouraging.

As most of you know, we are in the transition phase with our high-end Q-Tof product line. We've introduced our new Q-Tof Premier instrument, but we will not have finished units for customer delivery until the fourth quarter. Shipments of our legacy Q-Tof line that is being phased out dropped off faster than we expected, and were down actually about 50 percent. While at the same time, orders for the new Q-Tof Premier instrument have been very brisk. I think this bodes well for future MS revenue performance.

Our new LCT Premier, our single stage LCMS instrument, has continued to grow very well. And sales of our tandem quadrupole instruments, led by the Quattro Premier, also were up strong double digits.

Although our sales volume suffered this quarter with the Q-Tof transition, overall I'm pretty optimistic about the state of our mass spectrometry product line. Shipments of the Q-Tof Premier will begin in the fourth quarter.

Our new expression system, which combines the Q-Tof Premier with our new nano (ph) ACQUITY UPLC and new proteomics software, will begin shipping in the first half of 2005.

Thermal analysis and rheometry sales continued to deliver strong results and impressive year-over-year growth, based upon our strong market position and improved industrial spending levels. The growth was geographically broad-based, highlighted by expansion in Asia. In the US, sales to it major chemical manufacturers continued to build at a steady and we think sustainable rate.

Getting back to ACQUITY, in mid-August we began volume shipments of our ACQUITY UPLC system, and deliveries have proceeded continuously since then. I'm pleased to tell you that enthusiasm for this system continues to build, both within our organization and in the eyes of our customers. The initial installations, principally in key pharmaceutical accounts, have progressed smoothly and new levels of analytical capability are already being realized.

During the quarter we delivered approximately $12 million in UPLC-related systems, and in many cases have secured business for new mass spectrometry instruments with this revolutionary new front-end. We expect that shipments in the fourth quarter will double the installed base of UPLC instruments from the level at the end of September. We continue to see that the majority of systems purchased by customers are in either discovery or central analytical laboratories. And we expect this trend to continue for the remainder of the year.

I am pleased to tell you that several key accounts that now have first-hand experience with UPLC in their laboratories are considering the purchase of more systems. So clearly, ACQUITY is meeting our formal forecasts. But in general we have consistently seen that customers need to see the instrument in operation running their samples before deciding to place orders. Demand for demonstrations for ACQUITY is continuing at an unprecedented level, and coupled with the positive results reported by our early users, make as confident that ACQUITY momentum continues to build.

One somewhat disappointing area for us this quarter was informatics revenues. More time than expected in the third quarter was spent on operationally absorbing the acquired NuGenesis business into the Waters infrastructure. As a result, we lost some sales momentum and our informatics revenues were below our estimates. In addition, delivery of our eLab Notebook product was a bit delayed, and now it will begin shipments in the fourth quarter instead of the third as we originally anticipated.

However, let me assure you that interest levels at our major pharmaceutical accounts for the eLab Notebook and for our scientific data management system software remains strong. And we will actively promote the efficiency and security advantages of these products to customers now planning their 2005 budgets. We are optimistic about the long-term prospects for this informatics business.

In summary, we feel that we are in an excellent position to deliver a successful fourth-quarter performance. During the third quarter we began to see the positive effects on our new product initiatives. And in the fourth quarter, while anticipating a continuation of the relatively positive business climate, we expect to benefit from initial deliveries of the Q-Tof Premier, and of informatics products, and accelerating growth as customers increasingly adopted our ACQUITY UPLC technology.

Finally, before turning the discussion over to John I would like to comment on stock buy backs.

I think as you know, over the past 2 years we have completed 2 stock buy back programs, the first for $200 million and the second for $400 million. As you may recall, we told you on the last call in July that we were temporarily deferring a decision on additional stock buy backs for a variety of reasons, and that we would revisit our position before the end of this year.

I'm pleased to report that yesterday we issued a press release announcing that the Waters Board has considered and approved the largest authorization for a stock buy back in our history in the amount of $500 million. And we anticipate beginning purchases under that authorization this quarter.

With that I would like to turn it over to John for a more detailed view of the financials.

Thank you, Doug, and good morning.

Earnings per diluted share were 42 cents this quarter, including a 1 cent benefit from a reduction in our 2004 effective tax rate from 22 percent to 21 percent. Versus prior year on a pro forma basis, which excludes and in-process R&D charge last year, earnings per share grew 27 percent this quarter from a base of 33 cents in Q3 of 2003. Our business continued its positive momentum this quarter with sales growing 15 percent on a reported basis. This growth includes a favorable foreign exchange benefit of 4 percentage points.

Looking at product line sales in constant currency terms, sales of HPLC products grew as expected at 10 percent with all major geographies contributing positively this quarter. Our mass spectrometry products shipments grew by 5 percent in the third quarter. Our tandem quadrupole instruments continued to drive growth within the mass spectrometry product line. And we are encouraged by the continued strong demand in this segment of the market. Offsetting this growth, however, is a decline in Q-Tof shipments during the quarter as we built an order backlog for our new Q-Tof Premier instrument that we plan to ship in the fourth quarter. Customer shipments of our new ACQUITY UPLC system are proceeding as expected with approximately $12 million of ACQUITY-based systems delivered to customers this quarter. Our thermal analysis business continued its strong 2004 performance with revenue growth of 17 percent in the third quarter. And the addition of the laboratory informatics businesses added to overall sales growth by approximately 2 points this quarter. As Doug discussed, this business has yet to meet our expectations, as we have experienced delays in both the integration of these 2 businesses into the Waters Division, and the introduction of the eLab Notebook products.

Gross margin performance came in lower than expected and was down by 60 basis points over Q3 last year. Additional expenses associated with our service business impacted margins as we converted from distributed to direct operations in Asia and as we expanded coverage in other regions in anticipation of further service revenue growth. On the instruments front product mix impacted margins slightly as Q-Tof volume dropped and ACQUITY products ramped up with initially high production costs.

SG&A expenses increased 8 percent over Q3 last year, principally as a result of foreign currency translation and the addition of the NuGenesis business expenses. R&D expenses rose 13 percent, also largely as a result of the NuGenesis acquisition. Excluding last year's expensed in-process R&D charge, year-over-year operating margin performance improved by about 120 basis points as we continued to leverage our infrastructure while growing sales.

Turning to our effective tax rate, due to current and expected future trends concerning our sales and manufacturing mix, and in particular increased volume in our Ireland facility, we now believe that a 21 percent effective tax rate for the year is appropriate, excluding the tax impact of previous special charges. The third quarter's tax rate is 19.1 percent, reflecting the year-to-date impact of the tax rate change adopted this quarter. Based on current trends we believe the 21 percent tax rate is sustainable for the foreseeable future.

As Doug discussed, our Board of Directors has approved a $500 million, 2-year stock buy back program. While we continue to look for synergistic acquisition opportunities in the analytical instrument space to deploy cash flow, we do not firstly utilizing all of the 200 million plus of net operating cash flow we generate annually for acquisitions. Therefore, we plan to deploy excess cash towards this newly authorized buy back program.

At quarter's end outstanding debt totaled 393 million, primarily related to borrowings in the US used to fund prior stock repurchases and towards recent acquisitions. Cash and short-term investments totaled $471 million, bringing our net cash position to 78 million at the end of Q3.

We are comfortable with the current level of debt on our balance sheet and believe we have adequate flexibility to fund future share repurchases and acquisitions.

We're studying the recently passed US tax legislation to determine the feasibility of repatriating foreign earnings under this legislation at a reduced tax rate. The legislation provides for a onetime repatriation of up to $500 million in foreign earnings at a 5.25 percent tax rate, which would result in a onetime additional tax charge relating to the repatriation.

We continue to maintain a strong balance sheet with cash from operations of 63 million on a GAAP basis this quarter. Capital expenditures from the third quarter were $12 million, yielding net cash from operations of $51 million. Year-to-date cash from operations net of capital expenditures is $143 million, and we believe we will generate a minimum of $200 million of net cash from operations after capital expenditures for the full year.

Exploring cash flow in a bit more detail, this year's $143 million of cash flow includes a building purchase of $18 million and approximately $4 million in net litigation payments. Last year's comparable year-to-date cash flow on a GAAP basis was $64 million which included $60 million of litigation payments. Without these unusual litigation and building purchase payments, cash flow would have been 165 million and 124 million in 2004 and 2003 respectively or up 33 percent year-over-year.

Accounts receivable days sales outstanding stood at 79 days this quarter compared to Q3 last year, comparable to Q3 last year. Inventories are up over year-end balances, principally as a result of the ACQUITY inventory build and ramp up of the Q-Tof Premier. We expect inventories to drop in the fourth quarter as we accelerate ACQUITY shipments and begin shipment of the Q-Tof Premier.

We are pleased with our financial performance and believe our business prospects for the remainder of the year look positive as we continue shipments of our ACQUITY systems, begin shipment of our Q-Tof Premier and experience a continuation of the business environment we have seen so far this year. We believe these conditions will allow us to grow sales by about 13 to 14 percent in the fourth quarter before currency impact. Currency at today's levels should add about 2 percent to growth this quarter. At this mid-teens growth in revenue we expect earnings per diluted share of 60 cents for the fourth quarter with the normal 1 to 2 cents tolerance and before unusual charges. We expect margins to improve in the fourth quarter as we ramp up informatics shipments, begin shipping our Q-Tof Premier and implement additional manufacturing cost improvements. SG&A is likely to grow somewhat less than sales in the fourth quarter, and again impacted by the NuGenesis acquisition. This would bring our full-year 2004 earnings per diluted share to $1.79, and again before unusual charges.

Doug?

Thank you, John. I think at this point we can open it up for Q&A. Operator?

(OPERATOR INSTRUCTIONS) Larry Neibor.

Good morning. Thank you. I think on the previous call you had indicated expected shipments for ACQUITY in the 12 to $14 million range for the fourth quarter. Did I hear you correctly when you said that you expected the installed base to double from the 12 million installed base by the end of the year?

Yes. That's exactly right Larry.

But your overall forecast remains the same, so is some other part roughly weaker?

No, our overall forecast is roughly the same as it was the last (multiple speakers) exactly.

Okay. Thank you.

Darrell Pardy (ph).

Could you just give us a breakdown in growth on HPLC for the instrumentation versus consumable service?

Yes. Hold on a second.

We have chemistry -- or consumables growing about 9 percent. Service is growing in the low-teens and instrumentation kind of high-single digit.

Okay. With the pickup in instruments shipments, because they were in the second quarter, was that primarily an improvement in Europe?

We did see improvement in Europe. So I think our overall European business, including mass spec, was down in the second quarter and our European business was up in the high-single digits in the third quarter. So we clearly saw better conditions in Europe in the third quarter.

And then your forecast for the fourth quarter, approximately how many Q-Tof instruments do you expect to ship?

We're not going to go into unit data, but John --

We expect -- the forecast from a revenue standpoint has somewhere between 5 and $6 million of expected shipments of Q-Tof Ps.

On the eLab Notebook and informatics, what does the backlog look for shipments in Q4?

We don't also go into individual backlog data. I think it's fair to say that most of our forecast needs to be generated in the fourth quarter. So it's not like we're sitting there with all of that in backlog ready to ship in the fourth quarter.

In informatics?

In informatics, right. (multiple speakers) backlog, substantial backlog in mass spectrometry, but not in informatics.

Lastly, could you just give us the NuGenesis revenues for Q3?

Informatics in total -- Creon, NuGenesis, were about $5 million.

Thanks.

Derik de Bruin.

Good morning. So could you just give me a breakout in terms of the percentage of revenues for the HPLC, mass spec, the informatics and the TA?

Mass spec continues to be roughly 20 percent of revenue; HPLC, including NuGenesis, about 70 (indiscernible) $5 million of informatics; and TA roughly 10 percent of revenue.

I guess just talking about the overall business environment, have there been any discussions with the pharmaceutical companies in terms of what they're thinking of in terms of potential impact from repatriating any of their funds? Do you think you'll see a pick up in R&D spending?

I don't think that there's going to be a noticeable dynamic from that, frankly. I think their R&D spending is predicated on other elements of their business plan. And they're not likely to make decisions to substantially ramp up P&L programs based on their ability to move cash back to the United States.

Do you think that with the new emphasis on toxicology, particularly given the Vioxx situation, that you could possibly see an increased spending in QA/QC from the pharma companies?

I personally think it's kind of more likely to be reflected long-term in the development stage of where all those tox screens get originally developed, and the issue of looking for more rigorous screens during that development stage. I suppose you could see a direct result for companies going back at drugs that are on the market now and specifically looking at those. But those are almost like in the form of Phase IV studies. So they just get kind of buried in the overall development spending. Those samples get run in the same laboratories that a development program gets run in.

Just one final question --

I don't think that we will see a whole lot different in the regular QA/QC departments of these accounts.

Just one final question for John. John, I had a little bit of a technical problem. Could you just go over the tax rate guidance again?

Sure. As it relates to current year, we have reviewed the volumes of sales and the manufacturing volumes coming out of the various facilities that support those sales, and for this year we believe that a 21 percent effective rate is the proper number for the entire fiscal year. That then requires that in the third quarter we true-up the rate through 3 quarters to get to that effective 21 percent rate, which dropped the tax rate in the third quarter alone to 19.3. Then in the fourth quarter you'll see a 21 percent effective tax rate. And for the full-year you'll see a 21 percent effective tax rate without unusual items. And then we said for the foreseeable future we also believe that the tax rate will hold at 21 percent.

As we look at the future, we certainly look to continue to ramp up production in Ireland. And if there's any pressure on the rate it's probably more of a downward than upward as we look forward. But at this stage I would say 21 is a pretty good point on the line.

Actually I did have one more question. Looking at your net interest income line, just I guess what are you paying on the debt? And I guess what is the best way for us to look in terms of calculating that going forward (indiscernible) the share buy back?

We're paying somewhere around, I believe, maybe 2.5 percent -- I'm sorry. We're paying about 2.1, 2.2. We're earning interest overseas at a rate higher than that; probably the net interest income is being earned at a rate maybe 2.5, 2.6 as we blend all of the various pools of cash together, obviously the majority of it being overseas. So the net interest income arbitrage, if you will, is 30 to 40 basis points.

Great. Thank you very much.

Sarah Michelmore.

Good morning. A question on SG&A spending. And, John, I'm sorry; I know you went through it. But why was the spending growth so much less this quarter?

We had a number of expenses or programs that were delayed that we didn't begin in the third quarter that perhaps begin in the fourth. We've got -- really the impact year-over-year has been on the spending on the service side of the business. So we've been, as you know, putting service people in place. Those expenses end up in the cost of sales line as it relates to the service revenue. So we haven't had as much budgeted spending even, if you will, on the core SG&A line.

I think some of those expenses that were delayed this quarter will in fact hit in the fourth quarter, and we're likely to see a bit higher growth rate in SG&A as we move past the summer months and into the fourth quarter; Sarbanes 404 costs as well. So I think there was a little bit of a delay, as well as a shifting to some extent of our investments, and the service adds up in the cost of sales line.

So it sounds like double-digit SG&A growth is kind of what you're looking at for Q4, but still less than the top-line growth you guys are forecasting?

Yes. I would say as it relates to the fourth quarter we should see gross margins coming back in line with what we saw for Q4 in 2003. And we would see SG&A growing less than sales, but probably in the double-digit range.

I know you haven't given 2005 comments, but this foreign exchange the last couple of years has had a big positive impact on your model. I'm just wondering if you can walk me through where you think your leverage points are; if you could just talk about how much leverage you think you guys have in your business model next year from gross margin versus operating expenses, and where you think the profitability gains or the operating margin expansion opportunities are off of the sales line.

I think if we look at 2005 -- and as you pointed out we don't plan to give guidance on this today. But generally speaking we have said that we believe we are a double-digit 10ish type percent growth company. We think that we're that type of company without the benefit of foreign exchange. And certainly if you look at a number of the new products that we've introduced lately, we would believe that organic growth could move the sales line in that region of growth as we look at '05.

That being the case, we generally have also said that we try to eke out a tenth or 2 of improvement generally speaking in gross margins. Certainly as we ramp up the informatics business that will help on that front. But on the other hand, we still will probably have some amount of ACQUITY costs that will need to be removed during the year.

But I would say net, looking at a couple of tenths or so of improvement in gross margin generally speaking for this business is a reasonable expectation. And we also try to grow SG&A a couple of points or so less than the growth in sales. So I think all of that is true as you look at, at least early on, the business prospects that we're looking at here. And with all of that I believe you would be looking at operating margin moving somewhere between 50 and 100 basis points improvement year-over-year. We don't at this point see anything that would prevent us from doing that.

I think if rates just stay at the 128 kind of euro level that they're at now, you would get 1 to 2 points of currency favorable impact next year too.

Great. That's really helpful. 1 last question on Europe, just trying to understand what's going on there. I know when you guys reported Q2 in July that you had been working on some orders that you thought would fall in this quarter. So just wondering what you think the sustainable trend is there, ex any sort onetime orders that you've got in Q3 or had fallen into Q3. And really what is the sustainable demand trends that you're seeing there?

As I think on the last call, I said at that point that we had seen some of those orders fall in the third quarter. So that gave us some stronger feeling that the third quarter was going to be an improvement versus the second quarter. And so far, it is early in the fourth quarter, but Europe is starting out on a strong note in the fourth quarter too.

I still think that over the next year or 2 in general Europe is likely to be slower growth than the US and Asia. I do think that in the world of large pharma spending that there's a propensity for those large pharma companies to put more of their R&D spending outside of Europe rather than inside of Europe. But that's a long-term trend, and I think we're experiencing that for the last year or so.

(multiple speakers) pretty strong industrial and government spending in Europe. So food safety is currently a pretty strong trend, and I would forecast that that will continue. And environmental spending, things like dioxin analysis and things like that, are also probably a bit stronger in Europe than they are in the United States. And in our results this quarter we can see a little bit of that dynamic.

On Asia, what percentage of your revenues are now coming from Asia? And it seems like that is a big growth opportunity for you guys as a lot of infrastructure is being built over there. How do you see that market developing and are you making investments in your Asian infrastructure?

About 20 percent of our revenue is in all of Asia, including Japan. And you're right, I think that is and will be the fastest-growing area of our business over the next 5 years. We're seeing very good growth in most of the places you'd expect and some of the places you might not expect. But China, Korea, India in particular are all very strong areas of our business right now. And I think that much of that has been HPLC driven. In the last year and a half or so we have substantially restructured and begun to invest more in direct mass spec activities in those areas. That's beginning to pay off, but starting from a relatively small base. So I think we've got -- we're very encouraged by our long-term opportunities across the broad product lines in Asia. And I think that's going to continue.

Great. Thank you so much.

Steve Unger.

Good morning. First off, could you comment on the warranty provision, and just what's been booked so far, and what's outstanding, and how you're coming up with that?

The warranty provision is based on -- we would do a warranty provision by product line. We look at historical warranty costs, and then we project forward based on the rate of historical costs to ensure that we have a proper reserve for each of those particular product lines. We rely on history to the extent that we have new products that are being introduced that earlier on perhaps have a need for a little bit higher costs than they will ultimately. And we use that experience, if you will, on newer products to create a warranty provision for those products as well. So that's a comprehensive process that's done for all of our various product lines and is part of every quarterly close process that we go through.

And where are you at right now with both the provision and the accrual?

I don't have the details and front of me for the specific entries for the quarter. But again, we've gone through a holistic process, as we normally do in this particular quarter, and there's nothing unique about Q3 versus the rest of the year.

And then what's your expectation for informatics revenues in the fourth quarter?

We inspect the informatics revenues to become somewhere in the kind of 8 to $10 million range as we look at the pipeline and have conversations with the folks in the field as to what the book of business looks like.

And that's primarily license revenue? Is that correct?

That would be new placements, as well as an ongoing stream of license revenue, for products as well.

And that has a significant margin implication.

Yes it does. And 1 of the issues with the quarter as it relates to expectations of margin was we did anticipate shipping a bit more informatics. And that will have an improvement as we look at margins for the fourth quarter.

And that number is based upon your sales pipeline to date?

Yes, that's based upon, again, the best information we have to date. But as Doug said, we don't have a significant backlog, so we are looking for those leads to turn to orders and those orders to turn to sales during the quarter (multiple speakers)

And then just last question, or 2 parts to the last question. Could you comment about mass spec in terms of sequential sales increase or a decline and quantify that? And then how did the MALDI-TOF do in terms of sales and shipments?

Taking them in reverse order, MALDI-TOF, as you probably realize, has never been one of our most significant mass spec product lines. We did launch a new MALDI-TOF in the new year, and growth in that has been actually pretty good. But it is still not a very large piece of our mass spec revenues. Our mass spec revenues are weighted towards the Q-Tof product line, the tandem quadrupoles, and the LCT Premier.

I'm sorry. The first part of your question was sequential mass spec revenues? (multiple speakers) the answer is --

It's up about 6 percent or so over the second quarter. And we are expecting a 20 plus percent increase in the fourth as we ship the Q-Tof P.

So it was up sequentially in the third quarter?

Yes.

Okay. Great. Thank you.

John Sullivan.

Just a quick follow-up on the mass spec. Regarding the Q-Tof and the legacy Q-Tof line that slowed in anticipation of the new product starting to be shipped in the fourth, can you give us some sense of what percentage decline you saw in Q-Tof relative to what you might have otherwise expected? Was it cut in half relative to what you might have otherwise expected, for example?

Yes. The Q-Tof revenues were down over 50 percent in the quarter, whereas Q-Tof, the product family orders for Q-ToFs, were up pretty significantly (multiple speakers)

Understood. Right. You expect to get that back with the new products. Sure. This is a natural effect. Okay. Thank you so much.

Larry Neibor.

Just a quick follow-up on the industrial demand that you're seeing. You mentioned it was strong in Europe or at least recovered. Could you give us an outlook for the US industrial demand for your products?

Yes. US industrial was also pretty good. This whole classification of food safety has been an area of growth that's relatively new. A lot of imports of foodstuffs are coming into the United States. Shrimp is a particularly large and noticeable area. We see demand for our systems from the exporter who have to provide quality control assessments along with their shipments. We're also seeing kind of a reciprocal investment in terms of incoming QC in a lot of these agricultural areas. So that's a fairly noticeable dynamic. We're seeing pretty good demand coming out of more traditional polymer analysis labs. And I'd say we're continuing to see good constant growth out of environmental analysis applications.

Great. Thank you.

Michael Peterson.

On the eLab, was the delay due to a product issue or the restructuring integration of NuGenesis? And I guess more importantly, have all the issues been address now?

No, that was related to finishing the software. And we had anticipated shipping it in the third quarter. It's now going to ship in the next week or 2. So we think that was just kind of a month or 2 delay that looks good for shipment in this quarter.

And then on the service business and margins, how much longer should we think about you guys building out service and impacting margins? Is that a couple of quarters?

I think as it relates to a dynamic that you would notice in our P&L, no, that's largely behind us. You'll see maybe a little bit of it in the fourth quarter. But we think that most of that program in an incremental sense has happened.

And then following up on the question earlier about Asia, can you quantify what percentage of revenues you guys have in China and Indian now or is it too small?

No, I think I would prefer not a single them out individually. But growth rates are 2X the corporate growth rates. It is very strong.

And then finally, on the mass spec, with shipments for the old systems down 50 percent, how confident are you that it is customers evaluating the new Q-Tof Premier versus looking at alternative platforms?

I'm pretty comfortable that they're comfortable when they place orders with us, even though they can't get a delivery of it until the fourth quarter. So if you look at actual orders, the response is quantifiable and it is very strong. And the order growth rate in that product class was very good in the quarter. Just we moved it from the old product to the new Q-Tof premier, and so it did not all show up in the revenue line.

Okay. Thanks.

Vivek Kanna (ph).

I just had a question in terms of the Q-Tof. When do you expect to start shipping that product, Doug?

(multiple speakers) the Q-Tof P is going to ship most likely in November. I'm not going to tie myself down to a particular week, but we have ramped up manufacturing. I have spoken with the facility. We have materials in hand for that production. So we are comfortable that we're going to be able to ship at least 5 to $6 million worth of product in the fourth quarter. And I think I will leave it at that.

On then just on the HPLC, did you say that the software sales you were expecting, is that all acquisition-related, that 8 million? Would that be counted as acquisition or organic growth in the fourth quarter? I just wasn't sure.

That's the entire informatics business, if you will. The Creon business we acquired in June of 2003, so there is a little bit of overlap in the fourth quarter. So it's not all incremental. But the 8 to 10 million is the full informatics business, Creon and NuGenesis combined.

Great. And did you give what the organic -- how big is the Q-Tof business now on a annual revenue run rate compared to what it was? Is that 50 percent quarter-to-quarter or 50 percent year-over-year -- annualized difference? Do you see what I'm saying?

Third quarter against third quarter was --

It is down 50 percent in the third quarter. So I mean we had in the past talked about the Q-Tof business being as much as 25 percent of the mass spec product line. It's obviously less than that as we go through this year.

Great. Thanks.

(OPERATOR INSTRUCTIONS) At this time we have no further questions for you.

Okay, Operator, thank you very much. And thank you all for participating. And we look forward to seeing you next quarter.

Thank you again for joining. Have a wonderful day, everyone.