Thermo Fisher Scientific Inc. (TMO) Q1 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q1 2011 Life Technologies Corporation Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host today, Eileen Pattinson, Head of Investor Relations. Please begin.

Thank you, John, and good afternoon, everyone. Welcome to Life Technologies' first quarter earnings conference call. Joining me on the call today are Greg Lucier, our Chairman and CEO; and David Hoffmeister, Chief Financial Officer. In addition, Mark Stevenson, our Chief Operating Officer, will be available during the Q&A portion of the call. If you haven't received a copy of today's press release, you may obtain one from our website at lifetechnologies.com. I want to remind our listeners that our discussion today will include forward-looking statements, including, but not limited to, statements about future expectations, plans and prospects for the company. We believe these statements are based on reasonable assumptions, but actual results may vary. It is our intent that these forward-looking statements be protected under the Safe Harbor created by the Private Securities Litigation Reform Act of 1995. Additionally, we will be discussing GAAP and non-GAAP measures. A full reconciliation of the non-GAAP measures to GAAP can be found in today's press release or on our website. I will now hand the call over to Greg Lucier.

Thanks, Eileen, and thank you all for joining us. I hope you all had a chance to review the press release that we issued earlier today. Total non-GAAP revenue grew 1% for the quarter to $897 million and grew 2% excluding currency. Due to the difficult year-over-year comparables and the extraordinary events in Japan, organic growth was flat for the quarter. Excluding the impact from these items, organic revenue grew 5% and total revenue grew 6%. Non-GAAP earnings per share declined 2% for the quarter to $0.85. Excluding the estimated impact from Japan, earnings per share was $0.87, representing flat growth year-over-year. As a reminder, guidance for the first quarter was 1% to 3% revenue growth, excluding currency, and EPS flat to down, 5%. And so, I'm pleased to report continued strong underlying growth in the business. Looking ahead, our full year guidance of mid-single digit organic growth for the year is unchanged and we're on track to deliver non-GAAP earnings per share of $3.80 to $3.95. Since we've been getting a lot of questions on the events in Japan, I'll start out by providing an update on that situation. Clearly, the start of 2011 was a difficult one for our employees and customers in Japan. Thankfully, all our employees are safe and our facilities are undamaged. As you might expect, in the aftermath of the disaster, our offices were closed for several days as were many of our customers' labs. However, as soon as it was deemed safe, we commenced operations and began fulfilling customer orders. Never before has the dedication and fortitude of our employees been more apparent. And as a result, we are able to minimize the impact on the company's financial results. In terms of impact to our suppliers and partners, our distributors were all relatively undamaged and our regional supply chain was operational within a very short period of time. As we announced earlier in the quarter, our partner Hitachi High Technologies suffered damages at several of their facilities in the Ibaraki Prefecture. The site that was damaged produces our CE instruments and capillary arrays, as well as the 5500 sequencer. For a period of time following the earthquake, the Hitachi site was not manufacturing products as they assessed and repaired damages. As we announced in March, this halt in production caused the delay in shipments of the 5500, which was originally planned for the final weeks of the first quarter. At this point, Hitachi has resumed manufacturing of the 5500, CE instruments and capillary arrays. Customer shipments of the 5500 have begun and we expect to be able to clear a large portion of that backlog in the second quarter. The performance of our team during these extremely difficult times is a testament to the culture of execution that pervades the organization. In 2011, we continue on our efforts to create shareholder value by focusing on 4 key performance drivers. These are: Product innovation, geographic growth, expansion into new end markets and operational excellence. We made good progress on all of these areas in the first quarter, laying the groundwork for accelerated growth, both in revenue and earnings in the second half of the year. I'll walk you through some of the highlights before I hand it off to David to give you the detailed financial results. Over the last few years, we have assembled a portfolio of innovative products, heavily weighted towards high-margin consumables. It covered the entire spectrum of biological research. Due to the breadth and scale of our operations, our commercial and R&D teams have more conversations and interactions with scientists around the world than any other company in our space. These conversations and our relationships ensure that we understand the needs of our customers better than anyone else. And also serve as the cornerstone of our efforts to bring new products to market that are designed to the make essential research of our customers easier, faster and more accurate. In keeping with that goal, we launched a number of new kits and reagents every single quarter. In the first quarter of 2011, we introduced over 20 new consumable products, including a new addition to our gold standard TaqMan family of products, which is designed to detect cancer-related DNA mutations. This novel product was designed with customer needs in mind and is 10x more sensitive than any other product in the market. Another example of our customer-centered approach to innovation is the recently launched Ion OneTouch System. This bench-top device completely automates the sample preparation for the Ion Personal Genome Machine, reducing the time to prepare a sample from it's current 8 hours to less than 3 hours with only 5 minutes of hands-on time. We are particularly excited about this new advancement because the speed and simplicity of sample preparation now matches that of ion semiconductor sequencing. This significantly forward helps make genetic sequencing accessible to every Molecular Biology laboratory whereas as in past, only larger facilities had the expertise and financial resources to acquire and run DNA sequences. Sales of the PGM continue to ramp up and have exceeded our expectations on all measures. At the rate we are placing instruments, the PGM will have the highest installed base of any next-generation sequencing instrument within the next 12 months. Our second key performance driver is related to capturing the opportunity in emerging markets. We have taken a number of steps in the last few quarters to ensure that we are well-positioned in these markets to provide superior customer support, short fulfillment times and seamless back-office capabilities. To this sense, last quarter we announced the acquisition of Labindia, our Indian distributor. I'm very pleased to say that the integration is going very well and we have made significant progress in setting up a direct sales and support infrastructure in the region. Moving to this type of model in India allows us to strengthen our relationships with customers and ultimately drive revenue growth by creating brand loyalty, increasing consumable attachment rates and increasing volumes by selling across the product lines. Now during the quarter, we also announced the opening of a new Singapore distribution center that will serve as the hub for the Asia Pacific region. This 62,000-square foot state-of-the-art facility is the first of its kind for any life science company in Singapore. It's designed to improve service and ensure quality for our customers throughout the region. The planned expansion of several existing distribution centers in China and India will further support the new hub-and-spoke model, moving us closer to our goal of delivering in-stock products to customers within 3 to 5 days anywhere in the world. As we look to the future, we see opportunity to increase our growth rate by moving further into areas like forensics, food testing and molecular diagnostics. High growth in these areas is driven by new legislation and increased funding to find Molecular Biology-based solutions in medical and societal problems. We've had success with adopting our research tools and technologies for use in these market thus far. And have recently announced several new FDA and U.S. FDA approved Real-Time PCR-based products for use in animal and food testing. These products, along with our realtime PCR instruments enable more effective monitoring of the world's food supply by providing food producers with the complete workflow needed to rapidly test for pathogens and monitor the health of animals. On a molecular diagnostics front, the FDA recently granted 510(k) clearance for our stem cell growth medium, a consumable product used to grow human stem cells without the use of traditional animal origin media. This product is the first and only product of its kind to receive clearance by the FDA and we're excited about the potential to accelerate the regulatory review process for regenerative medicine studies. As we are able to participate more in these fast-growing markets, revenue growth for the company accelerates as well. Our last key performance driver, operational excellence, is focused on driving more of the revenue straight to [indiscernible] . During the quarter we've made significant steps towards achieving our goal of 31% operating margins by 2013. Productivity initiatives are being implemented across the organization and span manufacturing, supply chain and SG&A. Increasing manufacturing productivity by consolidating our manufacturing sites into fewer, more efficient locations is a major element of the plans. In the last several months, we have announced the closure of 6 manufacturing plants. Operations at these facilities will be transferred to designated centers of manufacturing excellence where we can operate at the highest levels of efficiency. In addition, savings associated with running fewer, more efficient plants continues to provide savings options for a number of manufacturing inputs to ensure we are getting the most of every dollar we spend in the manufacturing process. A number of initiatives to drive world-class efficiency in our business operations are also underway. Projects include the consolidation of local sales offices around the world, the implementation of shared services for back-office functions and a focus on increasing the effectiveness of our marketing programs. All of these initiatives have kicked off in recent months, and through careful planning and execution, we will begin to see the savings reflected in gross and operating margins beginning in the second half of this year. While we were executing on the larger strategies that I have described for you today, we haven't wavered in our attention to detail and the daily operating rigor that drives our culture here at Life. Focus on day-to-day execution is particularly important now due to the unusual challenges that we faced in the first half of 2011, including tough revenue comparables, currency impacts and the launch and ramp up of a few new big product lines. Most of these challenges impact the first quarter and as we move through the year, the tough comps dissipate as does the negative impact of currency on our results. New products, some of which we have yet to announce, as well as the impact of the productivity initiatives I described earlier, will begin to contribute to revenue growth and profitability in the coming quarters. As a result, both the revenue and earnings are expected to ramp up sequentially during the year and we are on track to deliver our full year goals. I could not be more pleased with the team's progress towards executing on the performance drivers that I've just described for you and I'm confident in our future. And with that, I'll hand it over to David to walk you through our financial results for the quarter.

Thanks, Greg. This quarter, non-GAAP revenue grew 1% over the prior year to $897 million. Currency had a negative 1 point impact on reported revenue growth and acquisitions contributed 2 points. Organic revenue growth was flat for the quarter. However, as you know that growth rate is in comparison to a very strong first quarter last year, where we grew over 10% organically, driven by a number of onetime items including the Japanese Police order and supplemental budget, H1N1 and royalties. Excluding the impact of these items, organic revenue this quarter grew 5% and the impact of the earthquake in Japan accounted for 1.5 to 2 points. Moving on to divisional results. Molecular Biology Systems had revenue of $426 million, down 3% organically from prior year. Strong demand for TaqMan assays was offset by slower growth in the PCR and Molecular Biology Reagent businesses, both of which faced a difficult year-over-year comparisons and were negatively impacted by reduced consumables demand in Japan, as the majority of customer labs were shut down for a time in the last few weeks of the quarter. Genetic Systems division had revenues of $228 million, down 8% organically from prior year. Growth in this division was negatively impacted by the delayed shipment of the 5500 sequencer due to the earthquake in Japan and slower-than-average sales of the SOLiD 4 System as customers delayed purchasing in anticipation of the 5500 launch. Overall sales of CE instruments and consumables declined in the low-single digits for the quarter, the result of a difficult year-over-year comparison. Excluding the impact of these comps, the CE business grew in the low-single digits in line with expectations. And as mentioned earlier, sales of the Ion Torrent PGM were strong. Cell Systems had revenue of $238 million, representing 11% organic growth. Growth in the quarter was driven by a strong demand across the portfolio. Organic growth by region in the quarter was as follows: the Americas grew 1%; Europe 2%, Asia Pacific 7%; and Japan declined 16%. Moving on to the other items. First quarter non-GAAP gross margin was 66.3%, 200 basis points lower than prior year. Higher price realization was offset by the negative impact of currency and mix. Price realization in the quarter was between 1% and 2%, similar to prior years. Mix was lower due to a year-over-year decrease in royalties and higher-than-expected sales of Bioproduction and the Ion Torrent PGM. On a sequential basis, gross margin increased by 180 basis points, primarily due to higher price and productivity, partially offset by the negative impact of currency. First quarter non-GAAP operating expenses were $342 million, flat versus prior year levels and a decrease of 4% on a sequential basis. The decrease in operating expense was the result of careful management of headcount and project-related spending in the quarter. Non-GAAP operating income was $253 million, a decline of 3.6% from prior year. First quarter operating margin was 28.2%, representing a decline of 130 basis points year-over-year. The decline in operating margin resulted from lower gross margin, partially offset by lower operating expenses. In terms of other income line items, we had $1 million of interest income, a loss of $1 million from currency and other items and the interest expense for the quarter was $34 million. Our non-GAAP tax rate was 27.6%. Our diluted share count for the quarter was 186.3 million shares. During the quarter, we repurchased approximately 4.4 million shares, spending $234 million. In the second quarter, we have repurchased an additional 1 million shares, spending $53 million. At this time, we have approximately 300 million remaining on our current share repurchase authorization. As a reminder, other factors impacting share count in the quarter are dilution due to our convertible debt, and employee stock options. GAAP diluted earnings per share were $0.50, which includes $0.27 per share of acquisition-related amortization expense, $0.03 per share of non-cash interest expense and $0.05 per share of business integration costs and other items. On a non-GAAP basis, which excludes these items, diluted earnings per share were $0.85. And approximately $0.87, excluding the impact of the events in Japan. Moving on to the balance sheet and cash flow. Our ending cash and short-term investments were $735 million. This compares to last quarter's balance of $855 million. Cash from operating activities were $115 million, capital expenditures were $17 million and free cash flow was $98 million. Return on invested capital was 8.9%. We remain on track to achieve our goal of 10% ROIC by 2012. Our ending debt as of March 31, was approximately $3.1 billion. This balance is made up of our convertible debt of $800 million and senior notes of $2.3 billion. Now let me take a moment and talk about our outlook for the next quarter and the rest of the year. In terms of full year guidance, organic revenue is still expected to be in the mid-single digits. Constant currency revenue growth, which includes the impact of acquisitions, is expected to be between 5% and 7%. Our outlook for full year EPS is unchanged, and it is expected to be between $3.80 and $3.95. Looking ahead to the second quarter, constant currency revenue growth is expected to be between 5% and 7%. As of March 31 rates, currency is expected to contribute slightly to second quarter revenue growth and to negatively impact gross margins by approximately 150 basis points because of our hedges, and negatively impact EPS by approximately $0.04. Q2 gross margins are expected to be approximately 264 basis points lower than Q2 last year. 150 basis points of the decline is due to the impact of currency. The remaining decline in gross margin is due to the impact of mix, primarily lower royalties, continued growth of the PGM instrument and a relatively high number of 5500 upgrades, including those originally planned in Q1 that will now happen in Q2. Full year gross margin is still expected to be flat to slightly down from prior year. Operating expenses in Q2 are expected to be 100 basis points lower as a percentage of revenue than Q2 last year. And as a result, operating margins for the quarter are expected to be approximately 150 basis points lower than prior year. Full year operating margins are still expected to expand by 75 basis points. Effective quarter, effective tax rate is expected to be approximately 28%. Average diluted shares in the second quarter are expected to range from 184 million to 186 million assuming an average stock price between $50 and $55. And with that, I'll hand the call back over to Eileen for Q&A.

Thanks, David. We have about 30 minutes for Q&A. [Operator Instructions] Operator, we are now ready for the Q&A portion of the call.

[Operator Instructions] Our first question comes from Marshall Urist with Morgan Stanley.

Just first on currency and kind of what's implied by guidance, you guys are sticking with the range but presumably currency should be more favorable than it's been in the past. So has kind of your organic earnings outlook changed so that you're offsetting that currency? You guys being sort of conservative to start the year waiting to see how things play out? A little bit more clarity there would be helpful.

Yes. Thanks, Marshall. Yes, at this point, we're not changing our guidance. Currency is positive at the current rates for us versus when we set guidance. But I think it's premature at this point to change our guidance on the expectation of a -- that the current change will remain. Just to give you an idea, the second half of the year at the current rates, currency would account for an additional about $0.04 per quarter or $0.08 for the full second half of the year.

Okay. Great.

But, Marshall, just to be clear, our full year guidance is based on December 31 rates. So we have not updated guidance based on the impact from the changing rates. The underlying business is exactly as we saw it when we gave guidance at the beginning.

Okay. Thanks. And then, Greg, maybe if you could just talk about the -- maybe give us a little bit more insight into the underlying kind of underlying business drivers. Japan I think we're pretty clear there, but I think people are going to be wondering kind of organic, underlying organic strengths in the business just given what we saw across, obviously, some of the unaffected geographies like Americas and Europe, quarter-over-quarter. So if we could maybe talk through that on a segment basis and just give us a sense of how those performed in the quarter, I think that would be helpful.

You bet. First of all, I think it is important to emphasize the substantial growth we had in the first quarter of 2010. With, as David said, organic revenue growth in excess of 10%, that is a tough comparable to kind of get passed in this first quarter. I think in the Americas, what maybe made it a bit more challenging was simply a slower spend on the research side in academia due to the uncertainty around the final 2010 budget. And so, I think that had some effect of slowing the revenue growth in the first quarter. Now the other dynamic we have is that we're going through, as has been highlighted in a number of different comments, a fairly substantial line shift change. And so the 5500 sequencer is being launched and upgraded out in the field, hundreds of sites, and we didn't see the consumable growth on the SOLiD 4, the existing instrument, to the extent we would have liked because customers were waiting for the 5500. So that had some impact on us in the first quarter. I think the good news here, just to end the story is, that we are seeing record growth of the Ion sequencer. And so we are launching those instruments. They're being installed. And now, we'll start to see the consumable growth from that particular instrument. And so that should have some nice kind of tailwind for us as we move through several quarters. So first quarter for us, as I said in summary, kind of a tough quarter in terms of lots of different things going on, but absolutely right on track for what we're trying to do in the full 2011.

The only thing I would add to that, Marshall, is if you adjust for the comps and Japan, and take a look at what our growth rates by -- are by region, they're basically in line with our expectations. So, for example, Americas grew in the low-single digits, Europe was mid-single digits, Asia Pac was in the teens and Japan was low-single digits.

Okay, that's helpful. And just 1 clarification. Just Greg, your comments on the U.S. academic market to start the year were interesting. Is that viewed -- that forecast, is that going to get better now that we have some idea about the 2011 budget from here, or is that still sort of now in the plan and PGM and other things kind of offset that? And then also, just a sense of how big of a contributor Bioproduction was in the quarter. Thanks.

Well, the first part, the NIH certainty has -- uncertainty has been lifted for the balance of that fiscal year, and we are starting to see return to kind of the normal trend lines. So that, I think, issue has passed us. In terms of Bioproduction, Bioproduction grew 20-plus percent again this quarter. So Bioproduction contend -- continues to be a terrific story for us.

Okay, great. Thanks for taking my question.

Our next question comes from Doug Schenkel with Cowen and Company.

Maybe starting with Japan. The earthquake had, I think you said a 1.5% to 2% impact on organic growth. Would you be willing to break out how much of this was supply chain versus decline in demand in March?

Yes, sure. It was probably about 50-50 in terms of the impact, Japan. And so about half of it due to supply chain and half of it due to lower sales in the last few weeks in Japan itself.

And the expectation is that the lost sales related to supply chain issues are not actually lost but those sales come back in Q2, is that correct?

That's correct.

Okay. And then, turning over to Genetic Systems, any chance you would break out the growth rates given that there was some disruption in that group that seems a little bit more pronounced than the other groups? I guess, specifically, would you be able to talk about what the CE growth rate was in basic research, CE in applied market and next-gen sequencing growth within Genetic Systems?

That's probably more detail than we want to get into on this call, but we could certainly follow-up on that. Maybe similar to the information I provided on the regions, in Genetic Systems, if we adjust for comps, Japan, the onetime items, the Genetic Systems was actually flat in the quarter.

Okay. And last 1, just relative to guidance, you provided either on the Q4 call or subsequent to the Q4 call, any changes in the quarterly pacing that you've talked about or the outlook for business segment by business segment growth?

No. Nothing's changed. We're on track for the plan as we originally laid it out.

Okay. Thanks for taking the questions.

Our next question comes from Ross Muken with Deutsche Bank.

I just wanted to dig in to sort of 2 of the kind of more attractive opportunities for you. You talked about the emerging markets a lot more recently, now you kind of detail in here sort of your Asia Pac strategy. And If you think about your share there today versus how you compared to typically maybe an academic campus or a biotech in the U.S. or Europe. And then you think about that next leg of incremental opportunity, what are the types of programs in place today to kind of capture that? And from a sort of C-suite perspective, is that where you're spending kind of maybe a disproportionate amount of time, as well as some of the other kind of points you made in the presentation?

Ross, this is Greg. The growth that we see in Asia really centers around winning with the basics. Right now, customers in certain cities have variable supply in terms of when they will get their product and customers, and the rest of the world don't have that variation. We are going to fix that, or I should say, invest in that, so that virtually every major city across Asia can get our 3- to 5-business-day delivery promise that we have with customers. And that's going to be implemented by mid this year. Second thing where we spend our time is investing in the sales infrastructure. So in a country like China, we started in a couple major cities having salespeople augmented with dealers. But now, as we grow, we continue to move more towards 100% of our own sales force in the major cities and we keep adding more geography where we invest in that sales infrastructure. So that's the other big area that we're investing in. And then lastly, we continue to look at opportunities to lower the overall cost structure of the company. A good example of that is our Bangalore R&D facility. Now obviously, that is more on the cost and productivity side of the company, but I'd also have to say it does help with our local image and brand and presence when we do R&D in a country like India that I think helps us in our conversations with scientific researchers there.

That's definitely helpful. And then on the capital deployment front, I mean it seems like you've been more focused recently on ROIC and certainly you've done some buyback here in the quarter and already in, I guess, Q2. I mean as you think about the balance sheet, the optimal debt levels you'd to get to in kind of the primary uses of capital, what's sort of, for the model or the plan you have, kind of the latest on the preference there?

Nothing's changed from what we talked about at the end of the year and we've been talking about for the last 6 months or so. In terms of our debt levels, Ross, we're targeting 2x to 2.5x leverage, and our plan is to stay in that range. Our philosophy is to invest in the future growth of the business. The business, however, generates a lot of free cash flow, and our intent is to return that excess cash to shareholders through share buybacks. We've got, as I said, in the scripted notes, we spent over $200 million in the first quarter, another $50 million in the second quarter and we've got $300 million remaining on our share repurchase program.

Great, David. Thank you very much.

Our next question comes from Tycho Peterson of JP Morgan. Tycho Peterson - JP Morgan Chase & Co: Maybe just first question on Cell Systems, you had very strong growth there off a pretty big comp. Can you just talk to what you think the underlying growth rate is for that business? Should we think about it being kind of double-digit growth? And maybe just talk to any color you can give on the stem cell opportunity and how big that business is now?

Yes, it's Mark, Tycho. So with regards to the Cell Systems business, we believe it's in sort of the mid- to high-single digits for the year. I mean you do see some of these quarter-to-quarter where we have a particularly strong quarter in Bioproduction with a couple of accounts. What we've done well in that is to be engaged early on in the process so these customers are scaling up in the media, in our other cell products. We're doing excellent scale up in that Bioproductions. That's where you're seeing the growth of that strategy really play out. In the stem cell area, we've been launching products and 1 example that Greg spoke about in the script was also getting more validation. And we see similarly there, as you begin to see some of the stem cell products also move into cell therapy, the opportunity for us to participate in the emergence of this cell therapy market, particularly moving into some of the Asian areas, we've been looking at opportunities there that will continue to drive that growth out of stem cell research, ultimately into cell therapy. Tycho Peterson - JP Morgan Chase & Co: Okay. And then, as we think about the kind of sequencing business, obviously some nice progress on the sample prep side there. I mean are you willing to give a box number for the installed base in the PTM at this point? And then can you talk on plans to improve accuracy? And maybe just any color on early mix of customers and plans to move into the clinic would be helpful, too.

Yes. So as we mentioned again, we're very pleased with the numbers we've got. It exceeded our plans for what we were expecting in Q1. So we're very pleased with the update. We don't want to break out the individual numbers, but we continue to see great traction. We're exceeding the performance specifications in terms of what we're expecting in terms of throughput of the chips as we've launched 314. We said it would be 10 megabases of data. We have customers getting over 20 megs and continuing to improve that. We're launching now the 316 and 318 chip at the end of the year. So great feedback from our customers that lead us into that area. As we go forward in the coming area, we certainly see the application to move into the more clinical area with the product. Part of that is simplifying the direction we've gone with the OneTouch, and that's made great progress. And we're just making tremendous progress as well with the accuracy. Particularly, 1 of the concerns is being getting accuracy at longer read lengths. And so, our single base pair accuracy is improving so that the 100 bases, we're already several times x greater accuracy than other next-generation systems at that read length, which is important to our customers. And then with this [indiscernible] product, we can improve the consensus, accuracy and calling. So I think you will see Molecular Biology and software improvements that will drive the accuracy ever higher. It will get great adoption in the coming years in the clinical applications. We remain -- so far, seeing that CE actually remains the gold standard in validation. So the fit between Ion and CE is also very strong as we validate in those clinical applications some of the discoveries as CE remains the gold standard there. Tycho Peterson - JP Morgan Chase & Co: And then you called out Bead Based Separation, I guess, seeing for the first time in kind of the release, I mean anything to read into that, understand obviously what the products are, anything you're highlighting there intentionally?

No, that business -- we called that out because that business has achieved double-digit growth for the last several quarters, so it's a good growth driver for us in the Cell Systems business as well. Tycho Peterson - JP Morgan Chase & Co: Okay, I'll hop back in the queue.

I worked on now a franchise, which is driving and embedded in many other products, in both in core diagnostic products and also the core research area. Tycho Peterson - JP Morgan Chase & Co: Okay. Thank you.

Our next question comes from Quintin Lai with Robert Baird. Quintin Lai - Robert W. Baird & Co. Incorporated: The guidance that you gave, kind of pacing throughout the year in anticipation of acceleration, I think you already said part of it is just the headwinds abating. Qualitatively, how much do you expect from new products like PGM and then maybe licenses to impact you in the back of the year, and maybe give some color on that, please?

So in terms of our guidance, Quintin, in terms of acquisition and contribution, it's about 1 point for the full year. And as you know, Ion Torrent does roll off in the fourth and that will be organic revenue at that point. We haven't split out the contribution from new products any further than that. But as you see the ramp throughout the year, you'll see part of it is because of the -- we get over the comps in the first half of the year, which is a big piece of why you see the ramp from first half to second half, and then you layer on the contribution from new products such as Ion Torrent and some other areas and you get the pacing that we've laid out. Quintin Lai - Robert W. Baird & Co. Incorporated: All right. And then, operating expense was a little lower than what we were expecting in Q1. Were you able to, when you saw things going in March, were you able to move down maybe some of your spending like in R&D? And then off the rate that we see here in the first quarter, is that the new base we should be forecasting off of? Or will there be a sequential increase in that as business gets better?

Well, I think, yes, we did take a look of what the quarter looked like. We had some programs we're planning to -- in the terms of productivity, programs that we put in place at the beginning of the year. And as we have in previous years and previous quarters, we monitor our spending depending on what the business outlook is, mindful that we not do anything to impact long-term growth. So yes, we did manage expenses carefully in the first quarter. Going forward, I would expect that, as we have in other years, as the growth rate picks up, we will maintain our commitment to the bottom line growth and we'll invest or cut back accordingly. Quintin Lai - Robert W. Baird & Co. Incorporated: Okay. Thank you.

Our next question comes from Derik De Bruin from UBS.

Mark, can you just elaborate a little bit more on what are you getting in terms of the -- of the 10- and 20-megabase yield on the Ion Torrent, what's -- how much of the yield of that, the accuracy, is in the Q20, Q17 range?

Well, it's actually a distribution of runs. So we get hundreds of thousands of runs on a chip, and so what you see is our distribution that occurs where actually we're trending to the majority of those at Q20 or we even get quality scores above that. So as we improved the core Molecular Biology and as we improved the accuracy on the calling side, the accuracy gets better. So the majority of the runs are already at Q20 or above. And then we'll continue to see improvement in that. Again, remember a lot of people are using Q20 here and scores that single-pass accuracy that will be used on from any with CE. In many applications, we'll then get a consensus average which, of course, if we fall higher than Q20.

Great. And David, I got distracted for a moment when you're talking about the geographical growth in the space. Is there anything -- how did Europe do, Western Europe do, in this quarter?

Western Europe actually did slightly better than it had been doing in the previous quarters. It was solidly middle digits, middle single-digit growth.

And what were the big changes from, I think, some of its weakness you saw there, or just people a little bit more comfortable with budgets or were there any projects that have been delayed? Just -- can you give a little, qualitative?

I think it was in both of those types of things. I think that the primary thing is that people have settled down from where they were with concerns about the budgets last year, and spending has returned to normal levels.

And then next question, do you intend to use all of your repurchase authority this year?

We haven't committed to that at this point, but as I've said, we intend to -- we've historically been aggressive in our buyback program and I don't think anything is going to change.

Great. I'll get back in the queue. Thank you.

Our next question comes from Tony Butler with Barclays Capital.

Just curious, Mark, today where you think the R&D dollars tend to be focused primarily. Is 1/3 still in sequencing, and what about the remainder? And then if I move forward, remind us how you think about R&D productivity and how you've been performing against your internal metrics? Thanks a lot.

Yes, in terms of the breakdown of the spend, it's still pretty much about 1/3 is in sequencing, as we launch the 5500 product, as we scale up on the Ion Torrent platforms. So those 2 areas are getting investment. The secondary is across the sort of microbiology franchise, particularly as we refreshed the qPCR franchise as we're launching into digital PCR some of the innovations coming across there. And then the third area as we come in some of the what we broadly describe as some of the bench top devices, and we have a series of those launches planned. They really continue to capture the consumables, run rate into those devices during the -- Our metric on the return as being -- using an IRR metric. As I think we said in the last Analyst Day, we're currently getting mid-teens and IRR and a return on net investment. And our goal is to push that up into the high-teens as we go on to the next couple of years here.

Thanks a lot.

Our next question comes from Jon Groberg with Macquarie.

Maybe if I could add just a little bit more on Ion Torrent. Have you started shipping the 316 chips yet or when are those set to ship?

The 316 is, with a couple of early access customers at the moment. We have them in our internal labs, and they'll be going into full shipment as we come to the end of the second quarter.

Okay. And given what you have in the installed base, are you willing or getting any kind of insight as to kind of what, there are daily or weekly run rate that you're getting on the PGM?

Well, they really just started ramping up but we gave an estimate for the year on the consumable usage...

$80,000.

$80,000 approximately a year, and we expect some pull-through from the units.

So you haven't seen anything as they have been more out in the field that would have you change that number?

No, we've seen very rapid adoption, I mean, really the faster run time allows customers to iterate very fast, and we're continuing to see good adoption as we get the units in customers' hands.

Okay. And then just last one on this. On the -- for the 5% to 7% constant currency growth guidance in the second quarter, is the only acquisition in that number going to be Ion Torrent?

Yes, it's the only 1 of any significant size.

Our next question comes from Jon Wood with Jefferies. Jon Wood - Jefferies & Company, Inc.: Okay, thanks. So David, are you willing to quantify the PCR royalty decline in the first quarter? And then I noticed you called it out the second quarter as well, any updated thoughts on kind of that royalty line for the year for 2011?

No, we haven't broken it out by quarter, Jon. But what we have said is in 2011, the royalty decline is $20 million, associated with qPCR. As we've also said, we've got a group that last year, was able to more than offset the $15 million decline that we had last year. And so they're basically working away to try and offset it at this point. But I don't have anything that -- or prepared to issue publicly and then update at this stage.

Jon, well, this is Eileen. I can tell you that the decline that we had in Q1 was in line with our expectations. Jon Wood - Jefferies & Company, Inc.: Okay, great. Thanks. Last one. David, the cash on the balance sheet, so I'm just thinking about the bond that could, or that may or may not be called. Is all -- relatively all of that $700 million or so, is that accessible by you guys at this point or are there foreign kind of repatriation issues with it?

No, we don't have any foreign repatriation issues. We have about $18 million that's restricted, that's left over from some covenants associated with the applied Biosystems acquisition. But other than that, all of that cash is available to us.

Our next question comes from Amit Bhalla with Citi.

On the Ion Torrent PGM, I was hoping you could just give us a little more detail in terms of the early customers that are buying or ordering the product. Is this market expansion that you're seeing or are these early adopters coming from the existing customer base?

Yes, Amit, I think we've seen a mix of both. I mean we're seeing some of the large genome centers who have already called us, with instruments, that are interested to try the new technology. There is a part of the live rescreening or as part of validation or [indiscernible] technology that they already have. We're also seeing with smaller universities now democratizing this technology, they're getting into it, both here in the U.S. In Europe, we so a good uptake. We sold into some of the Latin American countries as well. So we're seeing an expansion of the market of next-generation sequencing. These are typically molecular biology labs that we may have visited already and were using perhaps PCR and other molecular biology but hadn't yet made the move into next-generation sequencing. They also, perhaps, might have been an already customer, being easier to use, and so we've seen that switch of [indiscernible] and the adoption of the next-generation sequencing in those newer customers to us.

I mean, Mark, is it fair to say that right now, it's like 90% plus are existing customers, and the new market is still less than 10%?

I would say, I mean, the existing customers to license, we have such a broad portfolio. The majority still probably had an existing next-generation system, but it wasn't as high as 90%. We had a number of -- and have a large pipeline of new customers to next-generation sequencing.

Okay, thanks. And just a quick follow-up on food safety, is there -- can you just talk about what kind of impact you're seeing either in the U.S. or in Europe from food safety?

Well, it's been a good business for us. It had double-digit growth in the quarter, and we're investing in lots of new assays for that business.

Thanks.

Our next question comes from Isaac Ro with Goldman Sachs.

Thanks for taking the question. First up, in Cell Systems, your growth there has obviously been in double-digits the last few quarters, as I think a few other people mentioned. I am wondering can you maybe spend a little more time there and identify if anything has really changed in the underlying volume or pricing dynamics in that business? As we look at the long term, you guys have guided sort of mid- to high-single-digits, so I am wondering if that is still the right way to look at the growth in that business?

That business has benefited from, I'd say, the last 4 to 5 years of focusing very intently on key drugs in development and winning the media to be on those drugs, and we're now harvesting that work in that several drugs that have been approved. We are the media source for them. And so you're seeing that high double-digit growth now take place.

Got it. Okay. And then maybe just looking over to the diagnostic side of the business, hasn't gotten a lot of focus on this call but certainly a sizeable area of interest. And if you look at sort of building it over time, how do you look at prioritizing the acquisition of either distribution reach or content -- versus content?

Well, we realized that we will be building out the distribution reach for whether it's qPCR platform and then content or CE platform and content or we think Ion Torrent, as Mark was describing earlier, is going to be an important device in the clinic. We have a good, albeit, smaller-in-size base from which to build in that, our HLA business, and the AcroMetrix acquisition we made a bit ago, gives us some mass from which to build some sales management in each of the key regions. And so that's where we're investing through the year to build that overall sales force and that presence in the clinical diagnostics market.

Got you, okay. Thanks very much.

Our final question comes from Dan Leonard with Leerink Swann.

Thank you. I'll squeeze 1 in, plus 1 follow-up. First question -- and I'll fit them in the same sentence. The first question, is it the correct read that you won't be breaking out organic revenue growth in the next couple of quarters? And then my follow-up, you mentioned that Genetic Systems, excluding the comparable issues in Japan, was flat in the quarter. Does that reflect a dramatic slow down in your CE business? And if so, has anything incrementally changed on that front?

So, well, let me start and see if I can answer your questions. No, it doesn't mean that we will not be sharing organic revenue growth. We intend to share organic revenue growth going forward, just as we have in the past. In terms of Genetic Systems, that growth rate adjusted for unusual onetime items, and the impact of Japan was flat. Our CE business actually grew, again, adjusted for onetime items in the first quarter of last year and low-single digits, which was in line with what has been growing after the last several quarters.

Okay. Thank you.

All right. This concludes our first quarter earnings conference call. If there are any additional questions, please feel free to contact me. The webcast will be available via a replay on our website for 3 weeks. Thank you again for joining us this afternoon.

Thank you, ladies and gentlemen. Thank you for participation in today's conference. This does conclude the conference. You may now disconnect. Good day.