Q3 2007 Applied Biosystems Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good morning. My name is Rob and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Applera Corporation third-quarter fiscal 2007 earnings conference call. All lines have been placed to mute to prevent any background noise. During the speakers' presentation, there will be multiple question-and-answer session periods. (OPERATOR INSTRUCTIONS). I would now like to introduce Mr. Peter Dworkin, Vice President of Investor Relations and Corporate Communications for Applera Corporation. Mr. Dworkin, you may begin your conference.

PETER DWORKIN, IR, APPLIED BIOSYSTEMS: Thank you, good morning everyone. Thanks for joining Applera management to discuss the third quarter fiscal 2007 financial results that we issued this morning for Applera Corporation and its Applied Biosystems Group and Celera Group.

As in our previous earnings calls, this morning we will discuss both of our businesses separately, starting with the Applied Biosystems and then moving onto Celera. The Celera portion of the call will begin at 11:45 AM Eastern time and if the Applied Biosystems portion should run beyond 11:45, the Celera portion will follow immediately thereafter.

Present today are Tony White, Chief Executive Officer of Applera; Dennis Winger, Chief Financial Officer of Applera and executives from the Applera operating businesses. During this call, we will be making forward-looking statements about Applera's businesses, statements that are subject to the risks and uncertainties relating to our businesses and corporate structure that are referred to in the releases issued this morning and in Applera's filings with the SEC. We also will be discussing historical and forward-looking non-GAAP financial measures for Applied Biosystems. These non-GAAP financial measures are not in accordance with or an alternative for GAAP and may be different from non-GAAP financial measures used by other companies. A reconciliation of GAAP and non-GAAP financials can be found in today's press release and on the financial reports page of the investor relations section of the Applied Biosystems web site at AppliedBiosystems.com.

Please note that after this call, the text of these prepared remarks will be posted on the investor relations section of the Applera web site and on the separate IR sites of the Applied Biosystems and Celera web sites.

As in previous quarters, we've invited stockholders and other interested members of the public to submit questions for management consideration in advance of our conference calls. The goal is to give the investing public the broadest possible access to management. The e-mail address for summoning those questions is published in the release that announce the data and time for this earnings call. It's also published in the earnings releases themselves. Questions may be submitted to the e-mail address listed in today's releases during today's call and if there is time, management will field relevant questions.

Now Tony White will comment on the performance of Applied Biosystems during the quarter. During the ABI question-and-answer session, he will be joined by Mark Stevenson, President of the Molecular and Cell Biology Division; by Laura Lauman, President of the Proteomics and small Molecule Division; also by Lenny Klevan, President of the Applied Markets Division and by Mike Schneider, President of the Global Service Division. Tony?

TONY WHITE, CHAIRMAN, PRESIDENT, CEO, APPLIED BIOSYSTEMS: Thank you, Peter, good morning everyone, thank you for joining us. Applied Biosystems grew total third quarter revenues by 8% to $530 million, non-GAAP earnings per share grew by 6% over the prior-year period. Operational revenue, or revenue excluding the net effect of foreign currency, licensing fees related to the settlement with Bio-Rad Laboratories in the third quarter of 2006 and Ambion revenues in both periods grew approximately 5% over the prior-year period.

I would like to share with you some of the highlights that contributed to our third quarter performance. Our DNA Sequencing product category grew 3% over third quarter of last year and if up 4% fiscal year-to-date. We continue to view this performance as confirmation of our perspective that the DNA Sequencing market has stabilized and is growing modestly. Our sequencing instruments continue to benefit from the ongoing expansion and adoption of DNA forensics. We're seeing consumables growth driven by the increased use of Applied Biosystems' installed base of over 14,000 sequencers and by the promising launch of the BigDye XTerminator purification kit. This product is an example of our strategy to capture more revenue from customer workflows and in this case for preparing samples prior to their analysis on our sequencers.

With respect to our next-generation sequencing initiatives, the commercialization of our advanced genetic analysis platform is progressing as scheduled. We remain on target to provide the initial instruments to early access customers by mid-calendar 2007 and plan additional unit placements in the fall. We're running customer samples on the platform in our own labs and are presenting data at various scientific conferences.

Our Real-Time PCR and Applied Genomics product category grew 13% over the third quarter of last year, or 10% excluding the Ambion revenues and prior-year licensing fees related to the settlement with Bio-Rad. Real-Time PCR continues to grow in all sectors as an application for both genotyping and gene expression. On the instrument side, we also continue to see growth in quality and safety testing applications within the applied markets, especially in food and environmental testing. The use of Real-Time PCR continues to expand globally with the Asian markets particularly dynamic. Strong consumables growth in the Real-Time PCR and Applied Genomics product category benefited from uptake of our Taq Man assays which continue to be the gold standard for validation in screening applications in the research markets.

Ambion revenues continued to increase above the market growth rate for RNA reagents. Ambion products are being well integrated into the workflow solutions we provide to address customer applications. Another benefit from the Ambion acquisition is the positive impact the consumables culture at Ambion is having on the continued development of the [Total AB] consumables business strategy. Our core PCR and DNA Synthesis product category declined 9% from the prior year period primarily as a result of the expected decline in PCR royalty revenues.

Moving to Mass Spectrometry, we're pleased with another double-digit growth quarter as the category grew 12% year-on-year and growth was balanced across all of the application areas. I would like to spend a moment on a new FlashQuant workstation announced last week.

FlashQuant is another example of the innovation underlying the market leadership of the AB joint venture with [MDX-Sciex] in mass spectrometry. FlashQuant is the first of its kind front-end MALDI ionization system designed to run with the 4000 triple quad and the 4000 Q Trap. FlashQuant promises to greatly speed up compound screening and drug discovery for small molecule analysis. Also contributing to the performance across all the product categories was the product offerings from our global service division. Service grew 14% over the prior-year period with good order growth from the new service plan in specialized services.

Thank you very much. I'd like to turn the call over to Dennis Winger who will now review the financial highlights for the third quarter and provide an update to the Group's financial outlook for fiscal 2007.

DENNIS WINGER, CFO, APPLERA: Thank you, Tony. During the third quarters of both fiscal 2007 and 2006, the Group reported items that affected the comparability of results and the third quarter of 2007 is outlined in today's press release. Amortization expense related to the acquired intangibles (technical difficulty) before taxes by $2.8 million. Sales were $529.9 million (technical difficulty) Bio-Rad settlement, organic growth was approximately 5% without the impact of Ambion.

TONY WHITE: Excuse me, Dennis. Operator, I think there's some noise on the line. Could you please mute your line? It's interfering with the --.

OPERATOR: I'm sorry, I'm trying to identify that line right now.

DENNIS WINGER: Gross margins in the third quarter of fiscal 2007 was 56.4% versus 56.2% in the prior year quarter. The increasing gross margin was primarily attributable to the favorable impact of foreign currency and improved vendor pricing related to [enzymes]. SG&A expense increases in the third quarter reflect costs related to our acquisition of Ambion, higher employee-related costs and certain strategic investments to support growth. The increase in R&D over the prior-year period was primarily attributable to Ambion and the development of an advanced genetic analysis platform.

Third quarter fiscal 2007 earnings per share on a non-GAAP basis was $0.36, a 6% increase compared to (technical difficulty) in the prior-year period which included the benefit of the $7 million in licensing fees related to the Bio-Rad Laboratory settlement. As previously stated, a reconciliation of GAAP and non-GAAP financials can be found in today's press release and on our web site at www.AppliedBiosystems.com on the financial reports page of the investor relations section.

The net effect of foreign currency on fiscal 2007 third quarter EPS was a favorable impact of $0.03 compared to the prior-year period. Cash flow from operations during the quarter was $107.1 million and capital expenditures were $16.5 million. At the end of the third quarter, accounts receivable were $406.8 million representing 57 days sales outstanding and inventory was $145.2 million, representing 3.2 months of inventory on hand.

As of March 31, 2007, cash and short-term investments were $448.5 million, up from $343.7 million as of December 2006. This increase was largely the result of contributions from earnings. In the light (technical difficulty) cash flow performance during fiscal 2007, the Board of Directors determined that the Group had sufficient financial resources to pursue internal and external investment opportunities as well as to repurchase shares. Accordingly, the Board of Directors has authorized a repurchase of up to 10% of the outstanding shares of Applera Corporation/Applied Biosystems Group common stock. It is anticipated (technical difficulty) from time to time depending on market and business conditions.

Applied Biosystems has the following expectations regarding its financial performance in fiscal 2007. The Group …