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Immucor, Inc. (NASDAQ:BLUD)

F3Q10 (Qtr End 02/28/10) Earnings Call Transcript

April 1, 2010 8:30 am ET

Executives

Rick Flynt – VP and CFO

Nino De Chirico – President and CEO

Michele Howard – VP, IR

Analysts

Quintin Lai – Robert W. Baird

Bill Quirk – Piper Jaffray

Bruce Cranna – Jefferies & Co.

Scott Gleason – Stephens

Joshua Zable – Natixis

David Turkaly – SIG

James Sidoti – Sidoti & Co.

Daniel Owczarski – Avondale Partners

Operator

Good morning ladies and gentlemen. Thank you for standing by and welcome to the Immucor conference call. (Operator instructions) I would now like to introduce your host for today’s conference, Mr. Rick Flynt, Immucor’s Chief Financial Officer. Mr. Flynt you may begin.

Rick Flynt

Good morning and thank you for joining us to discuss our third quarter fiscal 2010 results. Participating with me on this call are Dr. Nino De Chirico, our President and Chief Executive Officer; and Michele Howard, our Vice President of Investor Relations.

Before we begin this morning, I'd like to read the following Safe Harbor statement. Many statements on this conference call constitute forward-looking statements that reflect our judgment about future events and circumstances, including statements or projections about future financial results or economic performance, or statements about plans and objectives for future operations. Actual results could differ materially from these forward looking statements.

The company does not intend to update these forward looking statements unless required to do so by Federal Securities law. For a detailed discussion of factors that could cause actual results to differ from these forward looking statements, please refer to yesterday's press release and the company's most recent SEC filings. We’ll make some brief comments and then go to Q&A.

I’d now like to turn the call over to Nino.

Nino De Chirico

Good morning. Let me start this morning with an update on our Quality System Project. As you may recall, our quality project is a two-legged approach. The first leg is the remediation portion of the project, which was meant to specifically address the items noted by the FDA, as well as other potential high risk compliance areas.

The second leg of the project is our core team approach working on each quality sub-system and our efforts to establish a world class quality system. As we stated in our press release last night, we have completed the remediation portion of our quality project. We have worked hard over the last two years to improve our quality system, but it is the FDA that will validate our progress.

As we have said in the past, we believe the next step in the process is an inspection by the FDA. Quality improvement is a never-ending process. The remediation portion of the project was focused on high priority areas. We will now focus on the low to medium priority areas as we work to meet our longer term goals of creating a world-class quality system.

We will continue our quality system efforts primarily with internal resources. Going forward, we do not expect future project cost to the material to our financial statements. I am very excited to the thought that we have launched our next generation high-volume instrument, Neo, in our European distributor markets.

The Neo replaces our current high-volume instrument the Galileo. As we said in our release last night, during February we received CE Mark approval in Europe and regulatory approval in Japan for the Neo. In our third quarter, we received 11 new orders in our European distributor markets with more than half of the orders being for new instrument placement.

Europe is a very important market for the Neo. More than 60% of the orders for Galileo were in markets outside the United States with the overwhelming majority of these orders in the European market. For the US market, we completed our 510 (k) submission to the FDA for the Neo in early January. We will launch the instrument in the US once we have FDA clearance.

The Neo will be attractive to a larger portion of the high-volume market than the Galileo, because of the significant improvement in functionality such as test capability. The Neo will also have the fastest turnaround time, and improve reliability. With these enhancements, the Neo is more appealing to large and medium-sized hospital markets as well as the donor center and reference labs. Production for the Galileo has stopped, and we have very few instruments left in inventory.

Turning to our molecular business, we are making progress on our molecular immunohematology strategy. The development of our next generation automated instrument for the molecular business is progressing well, and during the fourth fiscal quarter, we expect to receive CE Mark approval for our current product offering. CE Mark will allow us to further commercialize our molecular product using our current semiautomated instrument in Europe.

I would like now to turn the call back to Rick.

Rick Flynt

Thanks Nino. I’d like to start with our instrument orders for the quarter. We received 71 Echo orders worldwide during the quarter consisting of 46 orders in North America and 25 orders in the rest of the world, including distributors.

In the third quarter, we received a net total of 13 Galileo orders in the rest of the world including distributors. In the US and Canada, we continue to expect lower order volume ahead of the launch of the Neo in these markets.

As Nino said in the third quarter we received our first Neo orders. We received 11 Neo orders in the rest of the world market including distributors. Approximately half of the Neo orders were compared to takeaways. In our release last night, we stated that we expect to be about the high-end of our previous Galileo guidance range of 70 orders worldwide.

The Galileo guidance is a combination of our expectations for the Galileo and the Neo. For our Echo guidance, we expect to be below or close to the low-end of our previous Echo guidance range of 208 orders. This quarter we have introduced a new metric called instrument order backlog. This new metric provides the total number of instrument orders that are not generating reagent revenue and the expected annualized run rate. But either of the instruments have not been installed of the customer validation process has not been completed.

This new metric should help investors gauge future revenue growth from instrument orders. With the introduction of the instrument order backlog metric, we have discontinued disclosing cumulative launch to date orders as well as total live instruments. At February 28, 2010, we had an instrument order backlog of 219 Echos and the combination of 35 Galileos and Neos.

Turning to our financials, in our fiscal 2010 third quarter revenue was $80.5 million, up 7% or $5.2 million compared with the third quarter of fiscal 2009. Year-over-year revenue growth was attributable to price contribution of $3.1 million and volume contribution of $0.3 million. Volume contribution in the current year quarter was negatively impacted by fewer ship cycles as well as the mix of the cycles.

A large portion of our traditional red cell products and our Capture products are manufactured in ships based on ship cycles. A ship is a specific combination of products that are shipped at regular intervals throughout the year, such as every four weeks or every eight weeks. Our customers generally provide us with standing orders for the majority of the products included in the various ship cycles.

Individual ship cycles are comprised of a varying mix of products. We have approximately 14 different ship cycles for red cell products, and approximately 14 different ship cycles for Capture. Based on the rotation of the ship cycles and the calendar, the number of ship cycles by quarter will vary. For example, if a particular red cell ship cycle is shipped every eight weeks, we will have some quarters that will have one shipment of the cycle, and other quarters in the year that will have two shipments of the cycle. The third quarter of fiscal 2010 had three fewer ship cycles than third quarter of last year.

Additionally as I said, the products in the ship cycle vary. And the revenue difference between the ship cycles can be as much as $1 million. The ship cycles in the current year quarter were worth less than the ship cycles in the third quarter of last year due to product mix. The lower number of ship cycles as well as the product mix of the ship cycles both negatively impacted revenue in the current year quarter.

Revenue in the third quarter of fiscal 2010 was favorably impacted by $1.8 million from foreign currency exchange rate fluctuations. Consolidated gross margin was 69.2% compared with 71.4% in the prior year quarter. Total gross margin in the current year quarter was negatively impacted by cost related to the company's quality project totaling approximately $1.8 million versus approximately $600,000 of project costs in the third quarter of last year, after gross margin in the current year quarter was negatively impacted by manufacturing variances.

Operating income was $30.9 million or 38.4% of revenue in the current year quarter compared with $29.3 million or 38.9% of revenue in the prior year quarter.

Operating expenses were higher by approximately $300,000 in the current year quarter due to research and development spend for the next generation of molecular instrument. Our legal expenses related to the DOJ investigation and the associated law suits totaled approximately $500,000 or $0.00 per share net of tax in the current year quarter. On a year to date basis in fiscal 2010, legal expenses associated with these matters totaled approximately $2.7 million or $0.02 per share net of tax.

Diluted earnings per share was $0.28 in the current year quarter compared with $0.27 for the same period last year. The current year quarter included costs of approximately $0.02 per diluted share net of tax related to the quality project compared with $0.01 per diluted share net of tax in the prior year quarter. Cash flow from operations in the current year was $55.5 million compared with $54 million last year.

In our release last night, we updated our financial guidance for the full fiscal year 2010. We expect revenue to be in the range of $326 to $330 million. We lowered the top end of our guidance range primarily due to some instrument orders and tenders in Europe that will be delayed from the fourth quarter into next year. Turning to our gross margins, we expect to be in the middle of our previous fiscal 2010 guidance range of 70% to 71.5%. The expenses related to the quality process improvement project are classified as cost of sales.

We expect our fiscal 2010 full year diluted earnings per share to be in the range of $1.14 to $1.16. Our EPS guidance includes the $0.05 per diluted share net of tax impact related to the quality project as well as the $0.02 per diluted share net of tax impact related to higher legal fees. Fiscal 2010 guidance also includes a full year of BioArray expenses versus 10 months in the previous year. BioArray was acquired on August 4, 2008.

In conclusion, we believe fiscal 2010 will prove to be a significant year for Immucor. From a financial perspective, we expect to achieve healthy growth on the top line and bottom line even with the absorption of the quality project expenses and legal fees. Operationally, we have launched the Neo, our fourth generation automated instrument, demonstrating our continued commitment to bringing innovative automation to the transfusion market.

We have gained market share worldwide thanks to our instrumentation and our focus on the needs of blood banks, and we have continued to implement our long-term strategy by investing in our future with molecular immunohematology.

At this point, I will give the call back to the operator to begin our Q&A.

Question-and-Answer Session

Operator

(Operator instructions) Our first question today comes from Quintin Lai. Your line is open and please state your company name.

Quintin Lai - Robert W. Baird

Hi, this is Quintin Lai from Robert W. Baird.

Nino De Chirico

Hi Quintin.

Rick Flynt

Good morning Quintin.

Quintin Lai - Robert W. Baird

Good morning. Congratulations on finishing up the remediation phase. I guess can you help provide whatever color you can about what the next steps are with respect to the FDA and timing of maybe a visit?

Nino De Chirico

We believe we have done substantial progress in improving our quality system. At this point I think it is – we expect sometime in the future to have an FDA visit to inspect and validate our assumption. We cannot – of course; we don't know when this will happen. At this point that is the next step basically.

Quintin Lai - Robert W. Baird

Okay. And then with respect to the ship cycle, Rick does that normalize – do you get some of those ship cycles back in like this quarter or in the quarters going forward, so if Q3 was light then some others will be a little bit more?

Rick Flynt

Yes, that is correct Quintin. We have – over the year we will essentially have the same number of ship cycles, but depending on how the calendar falls some will have significantly more than others. Q3 was exceptionally light for us this year, and we expect to have a higher number of ship cycles in Q4.

Nino De Chirico

That is the reason we call it cycles because they come back.

Quintin Lai - Robert W. Baird

Well, could you help me out, so you said that some of these cycles can be up to, is it $1 million per cycle and you had three cycles that were light this quarter?

Rick Flynt

No, it doesn't work exactly that way Quintin. There can be a difference of up to $1 million between the cycles, but there are 14 different cycles.

Quintin Lai - Robert W. Baird

Okay.

Rick Flynt

So that is the difference between the high and the low.

Quintin Lai - Robert W. Baird

And from I guess the way you described it some of them a little heavier, so not only was there a top line, but were the gross margins also impacted because of the mix?

Rick Flynt

They were impacted some from the mix, but the primary impact is on gross margin. It was primarily due to some manufacturing variances. We had – due to the quality projects we had some reconfigurations and modifications to do in our manufacturing facility, and we had a shutdown of almost a week during the quarter. So our absorption of overhead was a little less than we normally have.

Nino De Chirico

They can also impact the gross margin a little. You know if you have less ship cycle, on Capture [ph] where we have higher margins, of course, we will have an impact on that. And if you look at between Q2 and Q3, in Q3 we had less ship cycles on Capture.

Quintin Lai - Robert W. Baird

Yes, I will jump back into the queue.

Nino De Chirico

Thank you.

Operator

Our next question comes from Bill Quirk. Your line is open and please state your company name.

Bill Quirk - Piper Jaffray

Piper Jaffray and thanks. Good morning.

Nino De Chirico

Hi Bill.

Rick Flynt

Hi good morning Bill.

Bill Quirk - Piper Jaffray

So, with respect to the plant shutdown for the week there due to the quality improvement project, will that help explain why inventory was down here sequentially, and then the second part of the question is would it be reasonable to assume then that you are going to run the plant a little hot here in the fourth quarter?

Rick Flynt

Well, the plant will be run based on the revenue. Our products are produced pretty much on an in time basis for the most part. We don't keep a substantial amount of finished goods products on the reagent side. A lot of our inventory is based on instruments and related parts.

Nino De Chirico

As we increase the number of cycles for the fourth quarter, we are going to increase production of course.

Bill Quirk - Piper Jaffray

Okay, understood. And then Rick, I was hoping that maybe we could take another shot here, trying to quantify – if we at least get a little better assumption in terms of the lost revenue, so to speak, because of the number of cycles that you had in the quarter. Can you help us think a little bit about that? Obviously you're shipping them in 14 different cycles during the year, but we're not looking at 3/14 of your revenue here that you missed in the third quarter.

Rick Flynt

No, no. The 14 cycles are just the different cycles that we have all within the year. We can ship up to 46 or so total cycles within a quarter. We were short this quarter by three cycles on our red cell products. And just to give you, I guess I gave you the $1 million difference between the cycles just to give you some flavor for how much that can impact between quarters and the cycles being less. But that is not – you can't have a direct correlation of 3 million times the three cycles that we were short.

Bill Quirk - Piper Jaffray

Understood. But so we – okay, I got it, Rick. So instead of shipping upwards of 46 we had more something closer to 43. Okay, I understand. And then, Nino, just a follow-up question here, based on your prepared comment, am I correct in assuming that you shipped about five Neos into distributors and then six directly to customers? Or rather, got five purchase orders from distributors and six from customers?

Nino De Chirico

Yes, exactly.

Bill Quirk - Piper Jaffray

Okay. And then just last housekeeping question for me, can you just break out the traditional and the Capture reagents for North America? Thank you.

Nino De Chirico

Yes, Capture in North America is $10,993, and traditional for North America is $38,659.

Bill Quirk - Piper Jaffray

Very good. Thanks guys.

Nino De Chirico

You are welcome Bill.

Operator

Our next question comes from Bruce Cranna. Your line is open and please state your company name.

Bruce Cranna - Jefferies & Co.

Hi, good morning. It is Jefferies & Co.

Nino De Chirico

Hi Bruce.

Rick Flynt

Good morning Bruce.

Bruce Cranna - Jefferies & Co.

Good morning. Firstly, on the revenue growth in the quarter, guys, I think, Rick, you said it was something like $3.1 million or so of pricing gain year-over-year, which looks like it's about 4% or so. And correct me if I'm wrong, but it looks a little bit lower than we're used to on a year-over-year basis. And I'm wondering is there a blip there or should we be thinking of pricing gains in that realm on a going forward basis?

Nino De Chirico

We believe that we're exactly in the guidelines about our price increase, price contribution. We said the guidelines was between 15 and 20. We will get exactly in the middle of the guideline at the end of the year.

Bruce Cranna - Jefferies & Co.

Okay, and then just – I don't want to beat the variance thing to death, but I know – at least I think I remember that in the third quarter last year there were variances as well. So is there some seasonality there? I mean should we – is that sort of every third quarter you shut down?

Nino De Chirico

We don't shut down every third quarter, but usually Christmas is at the end of December, then that what also has an impact in terms of output from the factory.

Rick Flynt

One of the things related to that, when you have fewer ship cycles you are producing less product from a volume standpoint. So you still have the same overhead to absorb, but it is less production.

Bruce Cranna - Jefferies & Co.

Okay. So there's no reason to sort of model that every Q3 going forward?

Nino De Chirico

Like I said, vacation or holidays will sure impact a little bit the output from the factory, no. Because…

Bruce Cranna - Jefferies & Co.

You just need to stop taking vacations.

Nino De Chirico

Say it again.

Bruce Cranna - Jefferies & Co.

Because you just need to stop taking vacations.

Nino De Chirico

We can move Christmas I mean.

Bruce Cranna - Jefferies & Co.

And then last for me just on BioArray, there was a – it looks like you had a pretty good quarter. I know it's early days there, but any thoughts on the next – timing on the next generation? I know you had – I think we're sort of targeting first half 2011 for an REO [ph] version. Is that still your thinking?

Nino De Chirico

Yes, that is still our thinking. Of course, like I said in my opening remarks the key milestone for us is to achieve this CE Mark in Europe because that will make the product, the technology available in Europe. Today – still very embryonic today to end-user we have sold $3.5 million basically of the technology, but like I said Europe is going to come in the picture as soon as we get the CE Mark.

Bruce Cranna - Jefferies & Co.

Okay. I'm sorry, I had one more. On the Neo side, also that looked like a pretty good number. Are those existing Galileo accounts?

Nino De Chirico

Like we said, there was almost 50-50 split.

Bruce Cranna - Jefferies & Co.

I missed that. Okay. All right, thank you.

Nino De Chirico

You are welcome.

Operator

Our next question comes from Scott Gleason. Your line is open and please state your company name.

Scott Gleason – Stephens

Stephens. Hi Nino. I just had a quick question. When we look at the implied guidance for the fourth quarter, kind of the midrange of the guidance is implying more like 4% growth. I guess can you give us a sense for what that would kind of incur in terms of the volume and pricing?

Nino De Chirico

Well, I don't know where you get from this 4%, but basically if you look at the first three quarters, like we said we are earning at revenue line plus 11% comparing with last year. And that I can split to you, it is 15% increase in instruments, 20% in Capture, 6.5% on traditional reagents, of course BioArray is embryonic, but is still doubling last year’s sales.

I think this is a good trend, and like we said at the end of our notes, I think we expect the trend to stay more or less around this range for year-end.

Scott Gleason – Stephens

Okay, and I guess just if you look at the system numbers, you're applying pretty strong system numbers. So I was just trying to get a sense – is that just the company kind of being conservative when you look at the guidance range, or –?

Nino De Chirico

Well, in terms of Echo, I think if you look at the three quarters for Echo because that's the way we should look at the business, we are – we had a very weak first quarter basically, and that's what is the results of the guidance for the Echo for the full year. Galileo, like we said, we are going to be well above our guidance because the impact of the Neo coming in the picture in Europe and we hope in US. But the European number alone already is bringing us above guidance. That's more or less our estimation.

Rick Flynt

And I guess just to add to that, if you look at the Neos that we're getting orders for currently, we won’t see that impact until sometime in fiscal year ’11. So, there will be no impact in Q4 related to the Neos, the quarter that we get.

Nino De Chirico

Yes, I want to remind everybody that when we say numbers of orders that does not mean that these are instruments installed and generating revenue. A good metric is always two quarter from the moment we get the order to the moment that they start to generate revenue. In other words, if you get an order in Q1, there will be at fully expected revenue in Q4. And all this order will be fuelling our growth for next year.

Scott Gleason – Stephens

Okay, great. And just one more question real quick for Rick. I guess when we look at the backlog, would you be willing to give us an idea of a rough percentage of what percentage of the backlog it represents actual installed systems versus what percent is systems that are not yet installed?

Rick Flynt

Roughly, it is about two thirds that are installed but not yet generating revenue at full rate.

Scott Gleason – Stephens

Okay, great. Thank you, guys.

Nino De Chirico

You are welcome.

Operator

Our next question comes from Joshua Zable. Your line is open and please state your company name.

Joshua Zable – Natixis

Hi, Natixis. Hey guys, congrats here on another solid quarter. Thanks for taking my questions.

Nino De Chirico

Hi, Joshua.

Joshua Zable – Natixis

I've got a bunch of questions. I know I'm kind of last in queue here, but a couple of things I wanted to go over. So first here, I guess just on the Echos orders here, obviously came in a little light; the second quarter in a row we are in that sort of 70 range. I guess is that sort of the right range to think about it going forward? Kind of how should we think about – I'm trying to think about not only Q4, but maybe next year. I know you guys don't want to give formal guidance, but is that kind of the right run rate now that we're sort of up and running and we've been out for a while?

Nino De Chirico

Well, you know, if you take the 70, 75 per quarter and multiply by four, you get exactly the middle of the guidance. I think like I said before, the outlier is the first quarter we got and a very low number. I said that if you look at the orders, I think overall environmental economical situation looks like it is improving, but in my opinion it is not yet where it should be.

Joshua Zable – Natixis

Okay. So I guess for now as what we know now, that 75, 70 range should be the right way to think about it going forward? Is that a fair statement?

Nino De Chirico

It is a fair statement.

Joshua Zable – Natixis

Okay, very helpful. Thank you. And then just on the Neos, helpful commentary there. So I guess you said '11 about more than half were new placements or new customers. Maybe you can kind of talk about the dynamic there just because obviously the key here is overseas whether or not you can continue to take market share with this Neo. Maybe you can give us a little bit of color on sort of what – why this would get new customers onboard as opposed to the Galileo?

Nino De Chirico

Well, I tried to say this on the guidance, the rationale of the conversation is that the Neo has additional features that the Galileo did not have. Specifically the start function that is the origin test [ph] and the better turnaround time that makes the instrument more flexible for hospital placement. The Galileo was really a large volume blood analyzer basically, and not much flexibility for medium and high volume hospital that works with many batch [ph].

Having better turnaround time and having a stat function makes the instrument more appealing for the hospital market, where we believe we've upside for market share gain.

Joshua Zable – Natixis

And then going back to the comments about the Echo, so we don't believe – because obviously the Echo had that stat function. That was pretty attractive to people too. So we still believe we can kind of maintain that level of Echo's? We don't think there's going to be any cannibalization overseas?

Nino De Chirico

Between Echo and Galileo you mean?

Joshua Zable – Natixis

Between Echo and now the Neo.

Nino De Chirico

And the Neo. I think the market segment there is some overlap in the middle between you know, in hospitalities medium-size, but I don't think the two instrument overlap. They complement each other very well.

Joshua Zable – Natixis

Okay, great. I just want to kind of get through a couple of things. And then Rick, very helpful giving us kind of year-to-date legal expenses, I was wondering if you could kind of, A, give us just I guess $2.7 million year to date, maybe kind of your estimate for the year, and then sort of what you think is going to be on a go-forward basis if we're going to sort of constantly have to do these things. I know a lot of things came out this year. And then just remind us of the total cost of the remediation and, again, sort of what incremental cost, if any, as we think about next year?

Rick Flynt

Okay, if I miss something you’ll have to remind me because there's quite a number of things to cover. So with respect to legal fees, I would expect, you know, we’ll kind of continue the same spend level in the fourth quarter as the third. You know, it's very difficult to tell because we have to just move along as we go. We will continue I think in the fourth quarter at that level. I can't really give you guidance on next year with respect to the legal costs.

Joshua Zable – Natixis

But I mean, same ballpark-ish, should it tick down, should it tick up? I mean, just any sort of range.

Rick Flynt

Generally, I think you need to think about the DOJ and legal proceedings related to that are going to continue for some time. This is, you know, we don't know for sure what the timing is, but we believe it's going to be a longer process.

Joshua Zable – Natixis

Okay, so the assumption is sort of maintain it flat at least?

Nino De Chirico

Well, at the least, yes, because another point I am going to make is that all this expense is, most of these expenses were not in the region of budget and guidance, and when additional expenses were incurred during the year.

Joshua Zable – Natixis

Right. Okay, very helpful. Very helpful, and then just on the…

Nino De Chirico

Another question was the total amount of the quality products –

Joshua Zable – Natixis

Yes.

Michele Howard

5.9.

Nino De Chirico

Yes, we spent $5.9 million in this fiscal year Joshua.

Joshua Zable – Natixis

And again, that should all go away? Is there any sort of recurring sort of trailer, if you will, to maintain it?

Rick Flynt

Yes, Josh, the $5.9 million is almost all related to consultants, and will go away. We will have some continuing cost related to the second leg of the project but we don't expect those to be material and we will not be reporting them separately.

Joshua Zable – Natixis

Okay, and then I know I've asked a bunch of questions. I have two real quick ones here, just one on the volumes. We know from other companies, and obviously our research, that blood collections have been down. I know there's a lot of stuff going on here this quarter with different shipping cycles and whatnot. I know people are trying to get their arms around it. But I'm just wondering if there's any color on that. Has that had any effect of the business at all?

Nino De Chirico

The reason I gave the three quarters results is to give you that there is we don't see any effect of that.

Joshua Zable – Natixis

Okay.

Nino De Chirico

The blood donation is not going down, maybe it's going a little down. It depends on – it’s some usage of blood, but overall blood donation is going up by 2% every year.

Joshua Zable – Natixis

Okay, and then last one, and I appreciate you guys giving me all these questions here. BioArray, I know you talked about CE Mark in next year hopefully.

Nino De Chirico

We said next quarter…

Joshua Zable – Natixis

I am sorry, next quarter.

Nino De Chirico

This quarter, the one in which we are in.

Joshua Zable – Natixis

I'm sorry, I misspoke. CE Mark this quarter – so when we think about CE Mark for that device, and we think about sort of the commercial device in the US, is this sort of a real commercial device that would be sort of a similar device that we have in the US once you kind of go for approval, or is this kind of another kind of lab-based product and not the sort of real commercial product?

Nino De Chirico

The device we are talking about is exactly the same device that is sold in US for researchers only.

Joshua Zable – Natixis

Okay. So…

Nino De Chirico

Then we are not talking about the automation strategy that we are working on. Then, Europe will be, the point is that today in Europe you cannot sell any BioArray technology because that does not have the CE Mark. Once we have the CE Mark, also like in US they are using for researchers only. In Europe they can use the technology not for researchers only, but for clinical utilization because they have a CE Mark.

Joshua Zable – Natixis

Okay, great.

Nino De Chirico

I don't want to say it is similar to FDA because it is not but it's a commercialization clearance basically.

Joshua Zable – Natixis

Great, guys. Thanks very much for taking all my questions. Really appreciate it.

Nino De Chirico

You are welcome Joshua.

Operator

Next we have David Turkaly. Your line is open and please state your company name.

David Turkaly – SIG

Hi, it is SIG. I'll try to keep it under 10 questions here. Really quickly for your analyst meeting coming up, is there – are you going to be able to show us anything from BioArray, or what should we expect in a couple weeks?

Rick Flynt

I think at the Investor Day we’ll have the Neo. We’ll do a demo on the Neo. We’ll also have an Echo there.

Nino De Chirico

We will talk about BioArray, but I don't think it's worth for us to show anything else other than the platform in terms of, platform, the solid phase we use the Beach Chip platform basically.

David Turkaly – SIG

Great. Thanks.

Operator

Our next question comes from James Sidoti. Your line is open and please state your company name.

James Sidoti - Sidoti & Co.

Good morning. It is Sidoti & Co.

Nino De Chirico

Good morning Jim.

James Sidoti - Sidoti & Co.

A couple – just a couple of questions on the pending approval from Neo. You said you put the application into the FDA back at the end of January?

Nino De Chirico

Yes, in the middle of January.

James Sidoti - Sidoti & Co.

Now I assume that's a 90-day clock that starts at that point.

Nino De Chirico

That's what usually happens.

James Sidoti - Sidoti & Co.

Okay. Now have you had any communications in the interim that would cause the clock to reset, or do you think you're still working off that original 90 days?

Nino De Chirico

We have had no communication yet.

James Sidoti - Sidoti & Co.

Okay, so as of right now you expect that over the next couple of months?

Nino De Chirico

Based on the history that should happen.

James Sidoti - Sidoti & Co.

Okay, all right. And then just a quick question on the stock buyback, you announced one a few months ago. It looks like from your cash flow statement you did not buy any shares in the quarter that ended in February. Are you – is the plan still open?

Nino De Chirico

Rick.

Rick Flynt

Jim, we continue to think that repurchasing shares is good use of cash flow, where we don't necessarily buy back shares every quarter, and we can’t really comment on why we did or did not buy back shares in the quarter. As you know, we did – the board did approve 2 million shares additional to our original plan and right now we have 2.2 million shares that are available for repurchase, and we will look to buy back shares opportunistically going forward.

James Sidoti - Sidoti & Co.

Okay, great. And then my last question, I just want to follow up on the comments you made regarding the recognition of revenue for the Neo. Is that something we should assume should happen maybe in the first or second quarter of the next fiscal year?

Nino De Chirico

I don't think, I did not talk about revenue recognition. I talked about generating revenue. That means basically when the customer wants an instrument, we start to buy reagents for the Neo at full pace. Revenue recognition is a different story. It depends if an instrument is sold or is in rental. If it’s outright sale, we recognize revenue over five years. Our last season sales is to distributor. If it is through distributor, we recognize the sales immediately. For rental, we keep the title of an instrument.

James Sidoti - Sidoti & Co.

All right. Let me ask it in a different way then. Do you expect those units to ship in the first quarter of fiscal 2011, or later than that?

Rick Flynt

I expect some of them to ship in the fourth quarter and some to ship in the first quarter of next fiscal year.

James Sidoti - Sidoti & Co.

Okay, and were the orders rental orders, or –

Rick Flynt

It was about half and half.

James Sidoti - Sidoti & Co.

Half and half, okay. Thank you.

Nino De Chirico

You are welcome.

James Sidoti - Sidoti & Co.

See you in a couple of weeks.

Nino De Chirico

See you.

Operator

Our next question comes from Daniel Owczarski. Your line is open and please state your company name.

Daniel Owczarski - Avondale Partners

Yes, thanks. Avondale Partners. Hi, good morning.

Nino De Chirico

Hi Daniel.

Rick Flynt

Good morning.

Daniel Owczarski - Avondale Partners

Rick, as far as – you broke out the price contribution, currency and volume. Do those typically fall in one bucket or another when we're looking at equipment or Capture or traditional, or do they impact evenly across the board?

Rick Flynt

Well, they impact all areas, not necessarily evenly. Their currency really is a result of our operations in Europe, Canada, and Japan. The pricing is across the reagents typically as opposed to the instruments, and the volume will be across all.

Daniel Owczarski - Avondale Partners

Okay. And then as far as the FDA, did they sign off on or agree to your remediation plan? In other words, did they say yes, you do these things and you'll be ready for reinspection, or could they come back and say you're still not ready for reinspection?

Nino De Chirico

The FDA does not sign off on anything. However, I will say that we have kept our communication very open with FDA. We have told them everything we are doing and, you know, I think without telling us specifically that we believe that the plan we have is, it's a good plan also for that.

Daniel Owczarski - Avondale Partners

Okay. Thank you.

Nino De Chirico

You're welcome.

Operator

(Operator instructions). Our next question comes from Quintin Lai. Your line is open sir.

Quintin Lai - Robert W. Baird

Hi, thanks for taking the follow-up. Rick, the updated guidance, does that also include an update on FX on current exchange rates?

Rick Flynt

We have incorporated what our expectations are for the fourth quarter Quintin. We currently are expecting the exchange rate to be comparable to what the exchange rate was in our last year fiscal fourth-quarter.

Quintin Lai - Robert W. Baird

Okay, all right. And then Nino, with respect to the orders that you got for Neo, given the fact that you got CE Mark in the last month of your quarter, were you kind of positively surprised that you got that many orders, and you know, I guess what is the feedback that you're hearing from those customers? Why did they order so quickly?

Nino De Chirico

Well, that was a positive not surprise, but we knew that there was some work done before. The difference between US and Europe is that you can promote a product even before CE Mark in Europe, you cannot do that in the United States, even though you can talk about but you cannot do a formal promotion. And I think this was the difference and as soon as we got CE Mark of course, some of this customer decided to sign a purchase order.

Quintin Lai - Robert W. Baird

Well, but I mean, I can understand that you know, current Galileo customers would switch over, but to get competitive takeaway so quickly without really anyone having a Neo in-house to take a look how it's working, that seemed to be a –

Nino De Chirico

It's a positive surprise but maybe, this was our also customer where the sales force was working on the Galileo before.

Quintin Lai - Robert W. Baird

Okay, thank you.

Nino De Chirico

You are welcome.

Operator

Our next question comes from Joshua Zable. Your line is open and please state your company name.

Joshua Zable – Natixis

Hi, guys. Thanks for taking the follow-up here. Just one quick one. Just on those Neo orders, can you give us color on what was purchase/rental kind of in expectations or what you're seeing out there just so when we think about next year because we know that – obviously how that affects the P&L?

Nino De Chirico

Well, we have not worked out the guidance for next year, and until we don’t get FDA clearance in the United States we cannot make assumption in the US market. What I can say though that in Europe usually where we are direct, mostly in Italy and South Europe or France, the instrument are placed on rental 90% because the tender includes the rental. And when we sell instrument outside our distribution channel, it is through distributor, it is outright sales. In the United States when we will have possibility to sell instrument, I think we should model in the same way we modeled the Galileo, with most of the instruments in outright sales.

Joshua Zable – Natixis

Great. Very, very helpful. Thanks, guys.

Rick Flynt

I just want to be kind to provide additional information about gross margin impact because when they are rentals we get even distribution of the revenue as well as the cost. If they go to distributor markets, the revenue and cost is recognized upfront and then when we – basically in the US when we sell the instrument and we get a five-year reagent agreement associated with that, we’ll recognize that revenue of the term of the reagent agreement, and all of the cost would be recognized upfront.

Joshua Zable – Natixis

So, on the distributor direct sale, you don't have that sort of gross margin issue?

Rick Flynt

No, it doesn't impact the gross margins but a lot of our distributors sales are at relatively low margins on the instruments.

Joshua Zable – Natixis

Okay. Very helpful, very helpful. Thanks Rick.

Rick Flynt

All right.

Operator

That was our final question. I'll now turn the call back over to Mr. Flynt.

Rick Flynt

Thank you for joining us this morning. We look forward to seeing you all at our upcoming Institutional Investor Day in New York on Wednesday, April 14th, and if you need any additional information about the Investor Day, please contact Michele Howard. Thank you.

Operator

That does conclude today's conference. Thank you all for participating. You may disconnect at this time.

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