Q4 2004 Ciphergen Biosystems Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good morning. My name is Bonnie, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Ciphergen announcement to review year-end 2004 financial results and events. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press star, then the number 2 on your telephone keypad. Thank you. Ms. Carruthers, you may begin your conference.

SUE CARRUTHERS, IR CONTACT, CIPHERGEN BIOSYSTEMS: Thank you. Good morning, ladies and gentlemen. With me today are William Rich, President and CEO; Matt Hogan, CFO; Martin Verhoef, President of the Biosystems Division; and Gail Page, President of the Diagnostic Division. Copies of the earnings press release were distributed last night and are available on our website. I would like to remind everyone that this call is for information purposes only. This call is being recorded and is copyrighted. And, therefore, please note, it cannot be recorded, transcribed, or rebroadcast without Ciphergen's permission. Your participation implies consent to our recording this call. If you do not agree with these terms, please drop off the line.

Our discussion today contains some forward-looking statements, including Ciphergen's expectations of future strategic plans and operational results. Various risks may cause Ciphergen's actual results to differ materially from these expectations. For a list and description of some of these risks and uncertainties, please see the report filed by Ciphergen with the Securities and Exchange Commission. The information in this conference call related to projections or other forward-looking statements may be relied upon subject to the previous Safe Harbor statement as of the date of this call, and may continue to be used while the call is maintained on our website. I'd like to [inaudible - background noise].

MATT HOGAN, CFO, CIPHERGEN BIOSYSTEMS: Thanks, Sue. I'm going to begin with a discussion of our financials, and I'll then turn the call over to Bill for a review of other corporate highlights. On November 30th we completed the sale of our BioSepra business to Pall Corporation for 32 million net of cash DAC. As a result, we now report our financial results reflecting BioSepra as a discontinued operation. Ciphergen reported fourth quarter 2004 revenue of 10.1 million, a decline of 13 percent as compared to 11.6 million in the fourth quarter of 2003, but up 19 percent from 8.5 million in the third quarter of 2004. We reported revenue from the sale of 37 systems, of which 8 represented trade-ins or upgrades of existing systems. 3 of our orders were for our older PBS IIc line, 2 were for ProteinChip interfaces, and 32 orders were for Series 4000, of which 18 were Enterprise Editions and 14 were Personal Editions. Instrument sales, which include upgrades and accessories, generated about 52 percent of total revenue in the fourth quarter, with 5.3 million in sales, compared to 6.8 million in the fourth quarter of 2003, and up 35 percent as compared to 3.9 million in the third quarter of 2004.

Total ProteinChip array sales were 2.8 million in the fourth quarter, or 27 percent of total revenue. Array revenues grew 18 percent on a year-over-year basis, and 19 percent sequentially. The remainder of our revenue was related to service activities. For the quarter, total service revenue was 2.1 million, or 21 percent of total revenue. Collaborative service projects accounted for about 403,000 of the total in the fourth quarter, with the remainder coming from providing maintenance services to our customers and paid training activities. Our gross profit for the fourth quarter was 6.2 million, which represents a 62 percent gross margin. During the quarter there were 2 major events impacting gross margin. First, much of our materials cost in the Series 4000 had previously been expensed to R&D when the system was in development, which helped gross margin. Offsetting that we substantially boosted our excess or obsolescence reserve for PBS IIcs, as we now see a more rapid transition to the new system then was previously forecast.

Sales and marketing expense, excluding deferred comp was 6.3 million in the fourth quarter of 2004 versus 5.8 million in the fourth quarter of 2003. However, our sales and marketing expense was actually about 400,000 less, or 6 percent, in the fourth quarter than compared to the previous quarter, due to the full effect of cost reduction actions taken in July. Research and development expense, excluding deferred comp, was 3.7 million in the fourth quarter as compared to 5.7 million in the fourth quarter of 2003. Our R&D expense was about 600,000, or 14 percent lower in the fourth quarter than in our third quarter, with virtually all the reduction related to our research tools business as opposed to our diagnostics efforts. General and administration, excluding deferred comp, was 3.3 million in the fourth quarter of 2004, versus 2.9 million in the fourth quarter of 2003. Most of that increase was due to the cost of complying with Sarbanes-Oxley. Our G&A expense was about 2 percent lower in the fourth quarter than in the third quarter, despite an increase in costs associated with complying with Sarbanes-Oxley. Due to cost reduction and program cuts taken in July, total operating expenses in the fourth quarter represent a decline by an annualized figure of 12.1 million as compared to the second quarter of 2004. This reduction exceeded our previously stated goals of reducing operating expenses by an $8 million annualized run rate by the fourth quarter. Our operating loss from continuing operations was 7.2 million in the fourth quarter, and our net loss from continuing operations was 7.6 million.

The BioSepra transaction was a significant event for us and bears some discussion. BioSepra was a very fine acquisition for us in 2001. We generated significant R&D synergy by combining BioSepra's chromatography expertise with our chip chemistries. We pioneered the concept of SELDI-assisted process proteomics, and we grew BioSepra's revenues from the time of acquisition. However, the large-scale sorbents business requires a specialized sales force and entails a very long sales cycle to generate orders of significant size. Our judgment was that we're better served to focus our resources, both financial and managerial, on our research tools business and our diagnostics business. We've been talking to Pall Corporation for long time about their strategic interest in acquiring our chromatography product line, and BioSepra's a unique property in that regard. It's a wonderful fit for their membranes business and their large, worldwide sales force can likely grow the sorbent sales at a faster rate than we could on our own. …