Waters Corp (WAT) 2007 Q1 法說會逐字稿

Good morning and welcome to the Waters Corporation first quarter financial results conference call. All participants will be able to listen-only until the question-and-answer session of the conference. This conference is being recorded. If anyone has any objections, please disconnect at this time.

I would like to introduce your host for today's conference, Mr. Douglas Berthiaume, President, Chairman, and Chief Executive Officer of Waters Corporation. Sir, you may begin.

Thank you. Good morning, and welcome to the Waters corporation first quarter financial results conference call. With me on today's call as usual is John Ornell, Waters' Chief Financial Officer, and Gene Cassis, the Vice President of Investor Relations. As is our normal practice, I will start with an overview of the quarter's highlights. And then John will follow-up with details on our financial results, and provide you with our outlook for the second quarter and for the full year.

But before we get going, I would like John to cover the cautionary language.

During the course of this conference call, we will 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 Q2, and full-year 2007. 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, view our 10-K Annual Report for the fiscal year ended December 31, 2006, in Part One under the caption "Business Risk Factors." We further caution that you 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 planned for July, 2007.

During this call, we will be referring to certain non-GAAP financial measures, a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measure is attached to the Company's earnings release issued this morning. In our discussions of the results of operations, we may refer to pro forma results, which exclude the impact of restructuring and purchased intangible amortization.

Thank you, John. Well, we have started off the year I think on a very positive note. The strength and demand that we saw building through most of 2006 continued through the first quarter of 2007, and led by several factors, including a continued strong uptake on our new products. We saw improving business with our pharmaceutical customers. We saw sustained strength in the industrial markets.

And I think of particular note, we, for the second quarter in a row, saw healthy growth in the United States. In all, these factors resulted in 11% sales growth before positive currency effects. We are particularly excited about this double digit growth quarter for our mass spectrometry based systems offering. This mass spec performance was highlighted by very impressive results for high resolution mass spec systems, including the Q-Tof Premiere and our new Synapt HDMS system.

Customers in both Proteomics and Metabanomics labs accounted for most of the demand in this product category. At the same time, sales of our new Acquity-based quadrupole mass spec systems, the SQD, our single quad, and the TQD, the triple quad, also grew nicely in the quarter. This positive start for mass spec is very encouraging, and fuels our confidence for achieving a very strong full-year result.

We are continuing to see the benefits of our complete solution approach to systems design, the seamless convergence of separation science and mass spec technology, and how it differentiates us in this market. Researches combine our Acquity UPLC with mass spec-based molecular characterization, and enjoy the advantages of seeing more deeply into their samples, while simultaneously reducing their analysis time.

If you turn to our chromatography business for a moment, sales of UPLC systems increased very significantly over last year's first quarter results, and customer acceptance of the benefits our small particle chromatography continues to transform, I think, the entire liquid chromatography marketplace. Feedback that we receive from users, continues to indicate that Acquity UPLC delivers industry-leading performance advantages, that are continuing to be unmatched by other commercially available offerings.

Clearly, our instrument systems business performed well in the quarter. But that is not the only positive part of our business. Service in chromatography consumables, combined to deliver another strong quarter of double-digit growth. Acquity UPLC column demand is ramping at an impressive rate, as the installed base of instruments expands.

We are continuing to broaden our line of Acquity columns, and at this year's Pittsburgh conference, we introduced a new silica-based UPLC particle chemistry, designed to facilitate the conversion of HPLC methods to UPLC. This new family of columns allows researchers to enjoy the chemical selectivity of the most common used HPLC packing, with the higher resolution and speed possible with UPLC.

If you turn to our market segments, we saw spending by our large pharmaceutical accounts continue to improve, and we saw double-digit growth for this business segment in the quarter. Feedback that was received from both our customers and our field sales force suggests that this positive trend in pharma demand is continuing. And that 2007 is likely to be a markedly stronger year for this segment of our business.

On the industrial side, an exceptional performance by our TA instruments group in the first quarter of 2007, along with continued growth by the Waters division in this Industrial segment, resulted in another double-digit growth quarter for the overall Industrial market segment.

Geographically, the sales growth performance in the first quarter was universally strong. This is the second quarter in a row for double-digit growth in the United States, and the improvement that we are seeing in spending by our largest pharma accounts is a key factor. However, Industrial, Government and University demand in the U.S. also helped in delivering the year-over-year expansion.

Last year, the growth in our business in Asia, led by our operations in India and China, contributed nicely to our overall corporate growth rate. During the first quarter of 2006, our Asian business benefited from strong orders growth, and a reduction in backlog that resulted in nearly a 40% growth in sales in the first quarter of 2006. During the first quarter of 2007, we saw a continuation of the strong underlying market dynamics that fueled last year's underlying demand. We anticipate higher sales growth in the second quarter and beyond, as we have now anniversaried that backlog dynamic that we saw in the first quarter of last year.

I would now like to say a few words specifically about our TA instruments business. The division started the year with good momentum, and continued through the first quarter to benefit from strong acceptance of its new products, and healthy market conditions. TA's first quarter results were exceptional, and it indicates that the division is poised for yet another year of impressive growth and record sales volume. So in recapping our top line performance, you can see how our advanced technology, innovative products, and operational excellence, are combining with healthy end markets to deliver superior revenue growth.

We have successfully leveraged this market performance with higher earnings growth, as you can see in the first quarter's 22% increase in earnings on a 14% sales increase. I have often stated that our financial objectives have delivered double-digit sales growth, accompanied by earnings growth that is higher than sales growth. While this quarter's results are in-line with that model, and are accompanied with very strong free cash flow. In fact, our first quarter record free cash results of nearly $80 million.

All of these impressive growth statistics were against a strong base of comparisons in 2006. We continue to grow our sales at a double-digit rate, while at the same time we are advancing our programs to ensure our long term competitiveness and profitability. I can't recall a time when we have been better positioned to address the needs of the fastest growing and most profitable segments of the markets we serve.

I am very optimistic about our future prospects for this year and beyond. We have a rich new product pipeline that will offer our customers both innovative technology and operational efficiency, while we simultaneously commit ourselves to programs, that will ensure future profitability and industry-leading returns to our shareholders.

Now, I would like John to take a closer look at the financials.

Okay. Thank you, Doug, and good morning. We are pleased to report another strong quarter of financial performance, with first quarter results delivering 14% growth in sales, and 22% growth in non-GAAP earnings per share. Earnings per share were $0.56 this quarter, compared to earnings of $0.46 last year.

I want to highlight the fact that we have decided to exclude purchased technology amortization from our non-GAAP results, to reflect financial performance consistent with how we manage our business. Additionally, this reporting change will put us on a comparable basis with our peers in the analytical instrument space. This revision added $0.02 to non-GAAP earnings this quarter.

On a GAAP basis, earnings were $0.54 in 2007, compared to $0.42 in 2006. A reconciliation of our GAAP to non-GAAP earnings is included in our press release issued this morning. Sales grew 14% this quarter, with currency providing 3 points of growth, and M&A activities providing 2 points.

Examining corporate sales growth regionally, and before foreign exchange effects, our sales results were positive in our major geographies, with continued stress in Asia, where we saw an 11% increase this quarter versus a difficult base of comparison. Sales in Europe were up 7% and in the U.S., sales grew by an impressive 21%. Sales for large pharmaceutical accounts were much improved and grew double digits. In global sales, the smaller pharma and industrial-based customers remained strong.

Turning to quarterly product line revenues, sales of LC products and services continued their strong growth, led by the Acquity UPLC technology, and grew by 9% versus a very strong prior year performance. Mass spectrometry shipments were up 12%. Sales of ow new instruments ramped up throughout the quarter. And our thermal analysis business had another strong quarter with sales up 33%, versus prior year.

This growth rate includes 5 points of growth from our acquisition of Thermal Metrics, and additionally, our TA instruments division finished 2006 with a larger-than-normal backlog of orders that was reduced this quarter, which helps explain the significant shipment growth. Without the backlog in M&A benefits, sales grew in the mid-teens.

Now I would like to comment on non-GAAP margins and expenses, which includes purchased intangibles amortization and restructuring charges in the base period. Gross margins came in at 56.7% for the first quarter, and were down somewhat from the first quarter of 2006, for a couple of reasons. The principal contributor was the rapid increase in foreign currencies, especially the British pound, which directly impacts the cost of our mass spectrometry shipments on a worldwide basis. The British pound increased by almost 12% from exchange rates observed in the first quarter last year.

In addition to this, we continue to experience significant growth in our newly introduced products, which bear higher manufacturing costs, early in their life cycle. This mix dynamic affects both our mass spectrometry and LC product lines. As I will describe later, we believe these costs will be largely mitigated as we make our way through the later half of this year. SG&A expenses grew at a rate less than sales and were up 10% this quarter, compared to prior year. R&D spending was down slightly this quarter, because of large project spending of prototype materials encouraged last year for new mass spectrometry products.

Our effective tax rate for the quarter was about 15.4%. During the first quarter, we purchased 1.5 million shares of common stock for $81.5 million. Cash and short-term investments totaled $504 million, bringing us to a net debt position of about $368 million. We believe we are well-positioned to fund our future working capital needs, and acquisition opportunities. We measure free cash flow, it is cash from operations, less capital expenditures, plus any noncash tax benefit from FAS 123-R accounting.

For the quarter, free cash flow was $77.7 million, after funding $13 million of CapEx, adding back $8 million of FAS 123-R tax benefits. Comparable free cash flow last year was $69.3 million. Accounts receivable day sales outstanding stood at 77 days this quarter, down one day versus Q1 last year. And inventories increased by $9 million, which is about typical for the first quarter of the year.

And now I would like to turn to our updated outlook for 2007. Our business prospects continue to look very positive, with most of our end markets and geographies enjoying strong customer demand. On our January call, we said that we thought organic sales would grow by 7 to 9%, and we chose an 8% single point estimate for financial modeling. We now believe that a 9% single point estimate is appropriate given our current market.

In addition to this base growth, acquisitions are expected to add about 1 point of growth, and currency at today's levels is expected to add about 2 points of growth. Our financial model therefore is for full-year sales growth of 12%. For full-year 2007, we believe margins will improve as the year progresses. Currency comparisons become more favorable to gross margin flow-through in the second half of the year, assuming rates stay where they are today. On a new product front, we will achieve more efficiency in our manufacturing operations, as volumes ramp up, and in addition, we expect to negotiate more favorable materials prices with our vendors, based on higher quarterly purchase volumes.

At this time, we believe our gross margins will show continuous improvement across the year, and that by Q4, we will likely show higher margins versus prior year. For the full year gross margins, are likely to be about 20 basis points lower than 2006 overall. Operating expenses are expected to grow at about 10% in 2007. At the operating margin line then, we expect to see an improvement in 2007 of around 50 basis points versus 2006.

Net interest expense is expected to be around $27 million for the year. And the net impact of our share repurchase program, will likely reduce outstanding share count to around 102 million fully diluted average shares for 2007. Rolling all of this together, we currently expect, we currently expect non-GAAP earnings of $2.72 per fully diluted share, with a normal tolerance of $0.01 to $0.02 per quarter.

This increase from our January guidance of $2.62, reflects a $0.05 benefit from higher sales volume of both organic sales and foreign currency translation, as well as a $0.05 increase from recalibrating non-GAAP EPS to exclude purchased technology. This represents a 19% increase over EPS of $2.29 last year on a comparable basis.

For Q2, we estimate sales growth of 14% comprised of 10% organic growth, 2 points of M&A impact, and 2 points of currency impact. At this sales level, we expect non-GAAP earnings per fully diluted share of $0.57, with a normal tolerance of $0.01 to $0.02 for the quarter, and for unusual charges. This represents a 16% increase over the $0.49 for the second quarter of 2006.

Doug.

Thank you John. Operator, I think now we can open it up for Q&A.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Quintin Lai with Robert Baird. You may ask your question.

Hi, congratulations on a nice quarter.

Thank you.

So diving a little bit more into the numbers here, could you talk a little bit about the visibility that you have on the industrial markets? It seems that things have been going well. You did very well versus a tough Q1 comp. How many quarters of visibility do you think that you have in that industrial market?

Well, I think the, when you use the term visibility, you first have to set the framework with, in the industrial market, like most of our other markets, we have worked with pretty thin backlogs, so it is not like we have, you know, 12 months of sales in our backlog at any point. So in that context, that is the framework that you ought to be aware of.

But if you think about the industrial market, you realize that it is made up of many discrete subsections. The fastest-growing in the last two or three years have been food safety and environmental analysis, I would say, both of which tend to be not very volatile.

The underlying dynamics that are driving those growths, certainly environmental is partly regulatory driven, and partly just individual company dynamic driven. So we don't see the likelihood that that environmental segment of the business is likely to slow down any time soon. The food safety segment of the business is largely being driven outside of the United States, although we are seeing good opportunities inside the U.S.

But outside the U.S. is also, a piece of that is regulatory, because of requirements for importing of the food, and a piece of it is just QA/QC driven. I would say the piece that we are seeing new grow more rapidly is the QA/QC piece, particularly in the beverage segment of the marketplace, let's say, is pretty robust. You roll all of that in, and we are not expecting throughout 2007 to see much erosion in the growth rate here.

Thank you. And then with respect to the U.S. pharma pickup, can you decouple the underlying demand versus demand that you are seeing for purchases of your newly rolled out products like the Synapt?

I would say that we are pretty comfortable with the fact that we are seeing an underlying base level pickup in the large pharma segment of the marketplace. I would say we are seeing Synapt demand from large pharma, but we are seeing Synapt demand importantly from other research institutions that are not large pharma based. So the demand, the pickup from large pharma is pretty broad-based.

Thanks. I will jump back in the queue.

Derik De Bruin with UBS. Your line is open.

Good morning.

Good morning.

Just a couple of questions. I guess when you are, if you can give us some idea on the growth rate in Acquity? You just said you saw both dramatic increases in both the instrument and the column level. Could you just quantify that a bit?

I would say it is greater than 20% growth, less than 100%. (laughter )

Okay. Thanks for narrowing the range. (laughter) Alright, I won't push you on that one. And I guess when you look at the gross margin, and clearly currency obviously made an impact on that, but was there any impact on pricing? What is the overall pricing margin, if we add to your competitors--?

You know, it is kind of the same story I have spoken of probably for over 10 years, which is in any individual quarter, sure, we run into price competition on a particular order, or in a particular territory. But broadly speaking, we don't see the market dynamics changing very much this quarter, versus what we are seeing every other quarter. And that is for the most part very, very good price stability. There are certain competitors who try to compete based on price.

But in our segment, it is, you know, it is fourth, fifth or sixth on the list with most of our customers, so I would say price stability is the thing to remark on, as opposed to price competitiveness.

Okay. And John, when you talk about 9% growth in HPLC and 12% in mass spec, are those the organic numbers?

Yes. Yes, that's without any foreign currency impact.

Okay. Great. I will get back in the queue. Thank you.

Tycho Peterson with JPMorgan. Your line is open.

Hi, thanks for taking the call. You have talked in the past about some of the other emerging market opportunities, between [CROs] and spec pharma and neonatal screening, can you add a little bit more color on some of these businesses?

Sure, I think the broadly characterized clinical or diagnostic business continues to be strong. We continue to see good opportunities in the neonatal screening. We are continuing to, on the development side look at ways to expand our reach in the clinical diagnostics business. And we think we will be developing more applications and more opportunities there. The underlying growth rate of our clinical business is higher than our corporate average, I am comfortable in saying that.

Okay.

If you think about the development of things like the CRO business, outside, particularly outside the U.S., that area is pretty robust, and continues to be robust. Particularly in developing areas like Eastern Europe, and in India. And I would say we don't see any real fall-off in the kind of strong demand in that area of the world.

Okay. And when you talk about pricing being fairly stable, I mean is pricing also stable with some of the emerging CROs, given a lot of them are coming out of lower cost countries or --?

Yes, I would say no sign in those yet.

Okay.

It is remarkable that, the thing to be remarked on will is that we don't deal with price competition nearly in those areas.

Okay. On M&A, you obviously had a pretty active '06. Can you just give us your thoughts here, how much of a priority that is, and you know, potential areas that would be interesting for you in terms of the portfolio?

I would say what you have seen in the past couple of years, Tycho, is pretty much what you should expect to see. We work on a number of projects that tend to be on the small side. Again, companies with sales in the 10 to $15 million annual side, as opposed to bigger opportunities, we like those, we think they are while not risk-free, they are on the very low side of the risk equation. They fit nicely with our existing management strengths. And they are almost all rapidly accretive.

But when you focus on things like that, you know, there are not eight of them out there to be done at any point in time. So if I look back on the last couple of years, we are working as many opportunities today as we have on average, in the last couple of years. Last year, a few of those came to fruition, maybe a little faster than I expected. This year, it may be that none of them will come to fruition. But if I were betting man, I would say we will probably get something done this year.

Okay. And then finally on Singapore, can you just give us an update there as how that transition is going?

Sure. For those of you who aren't aware, we have entered into an arrangement with a manufacturer in Singapore, and we have moved most of our Alliance instrument manufacturing to Singapore. And we have a long term plan to evaluate what else we can do in Singapore. We get cost efficiencies, and we get tax advantages by doing that.

We moved at a measured pace last year, to make sure that we can maintain our quality standards, and make sure that our customer support will be up to our high standards. That proved to be the case last year. And we are very satisfied with the results of that whole process, and I would say, you know, look to see us probably expand on that relationship over the next year or two.

Great. Thank you very much.

John Sullivan, Leerink Swann. Your line is open.

Hi, guys. Good morning. Can you flush out the appeal of Synapt a little bit for us? It sounds like it was a contributor in the first quarter. What applications seem to be emerging for this product? Guys, can you hear me? Hello? Hello?

Hello?

Hey, this is John Sullivan. Can you guys hear me?

Yes, we can, John. We must have a ghost in the machine. All of a sudden, we just got cut off. But I guess we're back on.

Okay. My question was simply, I was looking for a bit more detail on the Synapt business. It sounds like it was a positive contributor for you in the quarter. Can you talk about maybe some applications for the product that are emerging?

You are kidding. Guys, can you hear me.

Better now.

Okay.

John, we just had to switch to another speaker phone. I don't know with what is going on, but hopefully this won't have the same problem. Can you, I apologize but can you repeat the question again?

Sure. Can you detail a little bit the success that you have had seen for Synapt so far, and whether there are any particular applications emerging?

Sure. I would say from 30,000 feet, the initial reaction to Synapt has been phenomenal. And we are getting publications on specific applications. Those publications in those early applications have tended to be in the Proteomics and the Metabolite, more broadly described Metabanomics marketplace. The big thing that people are focused on with Synapt, is you can now see the shape of a molecule, where you couldn't before. The early applications in that tend to be looking at proteins, and whether they are folded or unfolded in a particular application.

Most people are remarking that there is no other analytical technology that is available that can offer them this characteristic. So I would say Proteomics and Metabanomics broadly described are the areas that we are seeing the most early indications. We are certainly seeing interest in small molecule capabilities. I can't tell you totally whether that is coming from the fact that in the future, they might like to have big molecule capabilities, but they like the Q-Tof aspects of the instrument.

I mean that is clearly one of the things that is great about the Synapt, is you can certainly use its classical Q-Tof capabilities, and have the IN mobility aspects in reserve, if you want them. So it remains to be seen as to how that aspect of this instrument is going to play itself out. But initially, certainly, the ability to look at the shape of the molecules is certainly driving demand.

Thanks very much.

Jon Groberg of Merrill Lynch, your line is open.

Hi, thanks. Congratulations on a good quarter.

Thank you.

Just a quick clarification. I know you talked about gross margins some, but in your fourth quarter call, you mentioned for example, that gross margins were about 1 point lower than what your normal expectations would have been, and you kind of quantified, you know, the impact of things like inventory levels and transition costs, and I was just wondering if you could do something similar for this quarter, just because if I look back, and the last time growth margins even approached this level is kind of the first quarter of 2003?

I would say the margin issue this quarter, first and foremost, is probably, I would say almost half of it is explained by foreign currency dynamics. And that is different than what we saw in the fourth quarter. We have had a very strong British pound, that strengthened to over $2. That is almost a 12% increase, or a little better than 12% increase in the quarter. At the same time, the Euro has gone up 9%. So shipments even out of Ireland that are making their way around the world, are significantly impacted versus the first quarter last year. So currency for sure is a bigger dynamic in the first quarter, than what we had talked about in the fourth quarter last year.

In addition to that, we know we continue to ramp up the other things, new single quads, the new triples, both of which have a higher cost on their introduction than where we see them landing as we go through the year. In addition to, as Doug had said, a pretty significant increase in the Acquity versus Alliance mix on the LC side, so from a product mix perspective, there is a much more meaningful impact this quarter, as this aspect has ramped up, really across all instrument offerings there.

After that, I would say that, you know, there were a couple of other smaller reasons relating to manufacturing, planning, where we had a little bit more production in the first quarter last year versus the first quarter this year, you but you are really getting down into the noise level of explanations, versus the mix dynamic and the FX dynamic I just described.

Just ignoring FX then, is your expectation, when some of these newer products are fully ramped, like the Acquity, for example, should that growth margin be higher than kind of Alliance currently? Or what is kind of the view as to where that will go, say over a year or two, two years, three years?

It will end up being comparable but you have to remember that the Alliance product has been out for a decade or thereabouts, and you know, we have got a number of years to cost reduce that product.

So unfortunately, the products take a fair amount of time to cost reduce to get to the level of the Alliance production. But I would say over the next, you know, 12 months or so, that we would get the Acquity close to the corporate average. The Alliance happens to be quite a bit beyond the corporate average.

But are you still getting the pricing premium on the Acquity?

Yes. Acquity prices have not eroded from where they were last year. The other thing Jonathan, when you think about the Acquity line in total, you have got a chemistry upside that will in fact help improve margins, as we continue to ramp up the volumes of Acquity columns versus the hardware.

Moving on in margins in general, you mentioned pharma was strong, and particularly in the U.S., but as we just look, and you look at some of these environmental, food safety, other applications, you know, I think your customer base is less concentrated, you know, one of the reasons people will say that you have such high operating margins, is because of the strong presence you have in QA/QC with the pharma companies. Is there any view as to what should happen at the operating margin level, as some of these other businesses maybe grow faster than your traditional businesses?

I think it is a fair question, Jonathan. But if you look, if you parcel out our various segments of our business, and you look at the areas that are much more focused on industrial and environmental and food safety versus pharma, we don't see our operating margins being materially lower in those segments of our business.

It is true that if you look at a territory like New Jersey, or New England, in some respects, it has a higher concentration of big pharma that you can cover that with, you know, one sales person, rather than a more broadly spread out sales territory, but on balance, in our, you know, our 1.3 billion plus world, it really gets lost in the rounding. And the net efficiencies turn out to be essentially comparable across these markets.

Okay. And last question, on R&D, are we taking a breather kind of from '06? Should this kind of be the sustained level? What are your expectations over maybe the next one to three years on R&D?

We are only taking a breather from the perspective of some of the material costs that were incurred as we ramped up the release to manufacturing of prototypes, and Elsa and Beta units at the start of last year.

From a head count perspective, we have been investing in the business, we have added significant head count to the micro mass organization over the last few quarters, so there is no intent at all to take a breather from making investments in R&D. The quarter really again just kind of goes back to some aberrations in material spend versus any other change.

I would say if you look at our P&L, our gross margin is a little abnormally lower than average this quarter. And we don't expect that to continue. And our growth in R&D spending is a little abnormally low this quarter. We don't expect that to continue. We expect R&D to grow a little bit more in terms with our sales growth over the long run.

Great. Thanks a million.

Quintin Lai, Robert Baird, your line is open.

Thanks for the follow-up. With respect to share buybacks, could you kind of go into a little detail for, with the new authorization and with the lower share count, actually the higher share count for the guidance, 102 versus 101, is it just a function of the current share price?

On that one, Quintin, a couple of issues. One is the fact that the treasury method of computing diluted shares, with the share price is higher, results in a penalty on the diluted share count calculation. And we incurred that in the first quarter, and we are expecting that to continue through the year. Thus the increase there.

We did finish, as you know, the original $500 million program in the first quarter. That was about $35 million that was left there. And then we began to execute against the new buyback program. And our current plan is to deploy all of our cash that we generate this year, hopefully first and foremost on some acquisition opportunities, as Doug had mentioned, but secondarily, share buybacks across the quarters, to the extent that we have free cash to do that.

And then with respect to the new guidance for excluding the amortized intangibles, so this quarter, you had a $0.02 benefit, could you repeat again, so for the full year, you expect a $0.05 benefit?

If you look at our costs from last year, and the P&L, they are not tax affected, so it is not obvious what that means in earnings per share, but last year, if you look at the purchased technology amortization, it represents about $0.04 of costs that were incurred last year, that we will now exclude in the base period comparisons.

And this year, we are expecting that cost to be somewhere around $0.05. It happened to be kind of a rounded $0.02 in the first quarter but for the full year, again it is a $0.05 uplift for 2007, versus a $0.04 uplift for 2006.

And just with respect to, I guess we will circle back to the previous question, a lot of your peer group that do exclude this, they tend to be very M&A active. And so should we just look at this as just going to trying to get apples-to-apples comparison, or could this portend a more increased future M&A activity?

Let me jump in. We certainly would like to do more of the kind of deals that we are doing. And we have devoted marginally more resources to doing that. So it is certainly a piece of our business strategy that if we could do, you know, two ERAs a year, we would love to do that.

But clearly, if you look at what is in our P&L right now, this is not a huge piece of our full-year P&L, but it certainly could be. And if you look across, even, almost everybody in our marketplace, they report their numbers, you know, excluding these costs. So we continue to get questions about it, and we said, it is better to make this switch when it is not material to us, and when we explain it in a quarter like this, rather than go on and on and on, and then make the switch at some other point.

Obviously, you can choose to do your own analysis about whether these costs are real costs, whether, they are certainly noncash costs, but we decided that we would best fall in line with how the industry does it, and you can certainly read into that, that amongst other things, that we would like to do more of the kinds of deals that we do, you should not read into this the fact that we want to do something that dramatically changes the kind of business that we are.

Thank you very much.

And at this time, gentlemen, there are no further questions.

Well, thank you very much all. I am sorry for the minor dislocation we had with the telephone service. We hope to talk to you all again next quarter. Thanks again.

Thank you for joining today's conference. You may disconnect at this time.