Symyx Technologies Q3 2007 Earnings Call Transcript

| About: Symyx Technologies (SMMX)

Symyx Technologies, Inc. (SMMX) Q3 2007 Earnings Call October 24, 2007 5:00 PM ET

Executives

Teresa Thuruthiyil - Vice President of Investor Relationsand Public Relations

Isy Goldwasser - Chief Executive Officer

Rex Jackson - Executive Vice President and Chief FinancialOfficer

Analysts

Avinash Kant - Broadpoint Capital

Jeff Zekauskas - JPMorgan

Dan Leonard - First Analysis

Jonathan Palmer - Thomas Weisel Partners

Bill Gibson - Nollenberger Capital Partners

Lynn Wanger - William Harris Investments

Operator

Good day and welcome everyone to the Symyx TechnologiesThird Quarter 2007 Financial Results Conference Call. This call is beingrecorded and may not be reproduced in whole or in part without written authorizationfrom Symyx Technologies.

I'd like to introduce your host for today's call, Ms. TeresaThuruthiyil, Vice President of Investor Relations and Public Relations at SymyxTechnologies.

Teresa Thuruthiyil

Good afternoon and thank you for joining us to discuss SymyxTechnologies recent results and outlook.

With me on the line today are Isy Goldwasser, ChiefExecutive Officer and Rex Jackson, EVP and Chief Financial Officer of Symyx.

Before we begin, I'd like to remind you that during thecourse of this call we will make forward-looking statements that involve risksand uncertainties. The statements contained in this presentation that are nothistorical are forward-looking-statements within the meaning of section 27A ofthe Securities Act of 1933 and Section 21E of the Securities Exchange Act of1934, including but not limited to Symyx's forecast for the fourth quarter andfull fiscal year 2007 and Symyx's disclosure of preliminary unauditedhistorical financial information for MDL and comments regarding fiscal 2008.

These forward-looking-statements involve risks,uncertainties and assumptions, including those described in Symyx's filingswith the Securities and Exchange Commission, including but not limited toSymyx's 10-Q for the quarter ended June 30, 2007.

If any of these risks or uncertainties materializes or anyof the assumptions prove incorrect, Symyx's results could differ materiallyfrom Symyx's expectations in these statements. Symyx assumes no obligation anddoes not intend to update these forward-looking statements except as the lawmay require.

And finally, a replay will be available for approximatelytwo weeks on Symyx’s website at www.Symyx.com or by dialing 888-203-1112 andfor international callers, 719-457-0820. The replay reservation number is7176545.

And now I'll turn the call over to Isy.

Isy Goldwasser

Thank you, Teresa, and good afternoon everyone. Thank youfor joining us today. We have a lot of information to cover, so I'll jump rightin. First with our recent highlights, then a summary of key changes we havemade to strengthen our business, and then with an update on our business units.Our CFO, Rex Jackson will then take you through Symyx's financials andpreliminary MDL historical financials. Afterwards, we will both be available totake your questions.

Transitioning to the quarter, we achieved our targets,reporting $26.1 million in revenues and GAAP diluted earnings per share of$0.73. On October 1st, we completed our transformative acquisition of MDLInformation Systems on schedule for $123 million in cash. We received $41.2million in pretax cash proceeds from our interest in Ilypsa, which was sold toAmgen in June for $420 million.

During the quarter, Borealis, a global leader in plastics,licensed Symyx software, purchased a Symyx tool and engaged our servicesorganization for technology development and software deployment projects. Thisdeal further validates the demand for integrated R&D offerings, isrepresentative of our growing relationships in Europe and provides goodvisibility and approximately $8 million in related revenues, most in 2008.

And last, I am pleased to report we completed our managementteam with the addition of Gerard Abraham, as President of Symyx Tools, and theappointment of Rex Jackson, as Chief Financial Officer.

Gerard comes to Symyx with many years of experiencedeveloping and scaling instrument businesses in global markets, having servedmost recently in several senior management positions at Thermo FisherScientific.

Rex joined us earlier this year and served for five monthsas interim CFO, negotiating the MDL acquisition and working closely with me asa member of the executive team. Furthermore, Dr. David Hill has been elected tothe Symyx Board. Dr. Hill has served since 2006 as President and CEO of SunChemical Corporation.

I also want to take this opportunity to thank Ed Gambrell,who regretfully resigned from the Symyx Board due to personal reasons. Ed madestrong contributions to the company during the past four years and we will misshim.

The most eventful and consuming proceedings of the quarterrevolved around the successful acquisition of MDL and subsequent integrationactivities. We closed the acquisition just a little over three weeks ago. ForSymyx, it was a significant step forward in building a strong, scaleable andsustainable business.

Once we work off the deferred portion of the MDL revenue,our combined software business becomes profitable and expands our presence inour target life science and chemicals markets with relationships with over1,000 customers.

The addition of MDL strengthens our ability to offerintegrated R&D informatics, automation and workflow solutions toresearchers. Furthermore, it accelerates our efforts to mature and expand ouroperating capabilities in customer-facing organization by 12 months.

Integration activities are well underway. This business unitwill be headquartered in nearby San Ramon and will do business as SymyxSoftware. Tim Campbell, President of Symyx Software is leading our customeroutreach initiative, which has generated early positive feedback from keyaccounts.

Existing Symyx customers are looking forward to additionalfeatures and capabilities resulting from an expanded product suite. Legacy MDLcustomers are looking for increased functionality and applications expertisefrom the Symyx team.

We believe the synergies will be significant and offer greatvalue to our customers. As part of the integration activities we took theopportunity to realign the entire organization for maximum efficiency andfocus. With the restructuring plan, we expect to generate roughly $20 millionof cost savings annually.

Our chief growth opportunities in software for 2008 stemfrom ongoing adoption of the new Isentris platform, the launch of Symyxnotebook products, and increased consulting opportunities.

Clearly, the integration of MDL with Symyx advance muchneeded changes for both organizations. It is a key event in the overallevolution of Symyx from niche research business to industry leader inintegrated R&D.

We are building a new type of company, aimed at a large andchanging market. We have a leadership position with significant barriers toentry. We have a proven solution package with successful customers and we havea clear strategy with a realistic plan.

Symyx began as a research business with a handful ofstrategic accounts and has now transitioned to the best-positioned company inthe industry, targeting the growing need for integrated R&D solutions forthe life sciences and chemicals markets.

R&D is changing, adapting to a new future whereinnovations are required in less time with less resources. R&Dorganizations are globalizing, outsourcing and rethinking how to best executein this environment. They are moving away from file-based, serial, manualpaper-based activities to digital, searchable, parallel and automatedoperations.

In this new dynamic, integrated R&D solutions will playa central role to create an environment where scientific themes use laboratoryinformatics and automation to work seamlessly and rapidly across products andgeographies, accelerating R&D and maximizing confidence in the results.

Our unique strength at Symyx is the powerful reinforcingvalue proposition of having software, tools and research offerings together. Wehave a proven established foundation and it is growing. Ten of the top-tenpharmaceutical companies are Symyx customers. Six of the world's top chemicalcompanies are Symyx customers. We are coming to market with a growing number ofscientific applications.

Now, let me take you through a description and a summary ofrecent progress across our business units. Symyx Software is R&D projectexecution and intelligent software, bringing informatics, collaboration andautomation to the scientific desktop.

With the acquisition of MDL, we will drive forward therecently launched Isentris 3.0 platform, the next generation of the popularISIS platform. Symyx Isentris 3.0 bridges internal and external information ina single search, alerting researchers to relevant scientific data andintegrating applications data and business rules on the desktop.

We also had a notable win when our services team was engagedby Bristol-Myers Squibb for its Lab to Plant initiative, a research anddevelopment wide initiative in response to the FDA's Quality by Designguidelines.

Looking ahead, our software team is focused on MDLintegration activities, customer outreach, as well as success with SymyxIsentris and Symyx Notebook to drive future growth. Symyx Tools providescustomers with integrated automated lab systems, designed to enable speed andefficiency. Our non-alliance tools business, that is revenue from customersother than Dow or Exxon Mobil, grew by 102% year-to-date and are expected togrow by more than 50% for the full year.

During the quarter we shipped tools to several longtimerepeat customers, including Bristol-Meyers Squibb, Merck, North Dakota StateUniversity and Proctor & Gamble. Our Symyx Tools team continues to focus onmarket penetration and marketing our modular, more scaleable offerings tocustomers. In research, we provide research services, collaborations and engagein our strategic partnerships that leverage Symyx scientists, tools andsoftware.

During the third quarter, we launched new chemical researchservice offerings and successfully engaged new customers. We are forecasting adecline in 2008 collaborations revenue, primarily due to planned decreases byExxon Mobil for smaller collaborations expiring in 2007 and 2008. Our near-termpriorities in our research are to establish a growing research servicesbusiness and strategic partnerships.

In terms of our alliances, we are negotiating with bothExxon Mobil and Dow to shape the next phase of our relationships. Ourdiscussions with Exxon Mobil have substantially progressed to shape an ongoingrelationship. At this point, Symyx forecast 2008 potential revenue from ExxonMobil of 70% to 80% of the forecasted 2007 Exxon Mobil alliance revenue.

With Dow, we are negotiating additions and extensions of ourcurrent relationship across all our offerings. We anticipate reaching agreementwith both customers by year-end and expect to work with both of these keycustomers on a long-term basis. We continue to put some of our resources towork for the creation of long-term high value strategic assets.

In this area we experienced success with the sale of Ilypsaearlier this year. Intermolecular, the private company aimed at leveragingSymyx high throughput technologies to the semiconductor market, continued toadd customers during the quarter. In the third quarter, they paid royalties toSymyx and sold a Symyx tool under their distribution license. Visyx, the sensorcompany spun out of Symyx late last year is being sold and we are looking topartially recover our investment in that venture.

Overall, as you can see, we have been disciplined aboutexecuting on the plan we outlined to you earlier this year. We are focusing ondeveloping a high performance R&D productivity business and establishingstrategic opportunities. As I mentioned before, we are building a new type ofcompany aimed at a large and changing R&D market. With strong execution, wewill build a high value business.

Now Rex will continue our discussion with the financialreview and forecast.

Rex Jackson

Thank you, Isy.

As Isy summarized earlier, we performed in Q3 in line withour expectations, with revenue of $26.1 million and EPS of $0.73. Revenueconsisted of $11.5 million from Collaborations, $7.5 million from Tools, $5.7 millionfrom Software and $1.3 million from Materials and IT licensing.

Compared with Q3 of 2006 and excluding $2.1 million in our2006 results from our sensor business divested in November of last year,revenue was down 5% quarter-to-quarter with each of Collaborations, Tools andSoftware below the prior quarter. Q3 2007 diluted EPS includes a $0.74 pershare gain from Ilypsa, non-cash amortization of acquisition relatedintangibles of $0.02 per share and stock-based compensation expense of $0.03per share, all net of taxes. Our Ilypsa after-tax gain was slightly higher thanour $0.70 per share forecast due to certain state tax benefits that reduced theoverall applicable tax rate.

Our EPS was at the high end of our estimates due to acombination of slightly higher revenue, mix and expense management. From a cashperspective, we ended Q3 with $192.5 million, reflecting approximatelybreakeven operations, approximately $1 million of merger related costs paid inQ3 was capitalized as part of the MDL acquisition and approximately $41 millionin pretax proceeds from the Ilypsa transaction.

Looking forward on cash, the MDL acquisition willsignificantly increase our cash flow seasonality. Historically, Q4 has been ourlargest quarter for Tool sales, with cash declining in Q4 to meet shipments andincreasing as we collect receivables thereafter.

MDL's renewals are concentrated in Q4 and Q1 and so cashreceipts are also concentrated in the early part of the year. Accordingly,going forward, we expect our cash low point will be Q4 and our cash high pointwill typically the Q1 to Q2.

In addition to the $123 million we paid on October 2 forMDL, we expect the following significant near-term cash outflows. Up to $20million to $25 million to fund MDL's working capital requirements in advance ofsignificant cash collections beginning in Q1 estimated Q4 tax payments ofapproximately $15 million, including payments on the Ilypsa gain andapproximately $13 million in acquisition related one-time and restructuringexpenses.

During the third quarter, we implemented a $25 millionrevolving line of credit with Banc of America. However, we currently expect wewill not access this line in Q4 and that our cash balance will rebound in Q2 asexpected.

Turning now to MDL, we have made great progress in preparinghistorical U.S. GAAP financials for the acquired business. As I mentioned inour August conference call announcing the transaction, our challenge wastwofold, carving out the business we purchased from the portion of the businessElsevier retained and converting from international financial reportingstandards to U.S. GAAP.

We are providing revenues and operating income loss forfiscal years 2004 to 2006 and for the nine months ended September 30, 2007 togive you further insight into this business. However, please note these numbersare preliminary and unaudited and are thus subject to change.

For fiscal 2004, 2005 and 2006 applicable MDL revenues were$85.5 million, $90.3 million and $81.9 million respectively. The higher totalin 2005 reflects certain licenses for which revenue could only be recognizedunder U.S. GAAP at the end of the term rather than up-front or ratably.Revenues for the nine months ended September 30, 2007 are $58.4 millionto-date.

As these figures indicate, MDL's top line has declinedrecently, reflecting some renewal attrition and lower new licensing andconsulting revenues. We believe these issues were substantially due to theuncertainties and disruption occasioned by a prolonged M&A process and todelays in releasing new products.

We took these factors into account in the acquisitionprocess. With the deal now done and the recent release of Isentris 3.0, we aremoving aggressively to address these issues. MDL’s operating profit loss forfiscal 2004, 2005 and 2006 was a loss of $0.05 million, and profits of $12million and $7.3 million respectively. And for the nine months ended September30, 2007 has been $5.3 million.

With the restructuring we began earlier this month, we aretaking approximately $20 million of costs annually out due to overlaps in thedesire to streamline our corporate operations. The improved organization andcost structure together with our increased investments in key areas such assales, marketing and customer support, should help us drive better topline andbottom line performance in Software and in our other businesses.

Looking forward now, for Q4 we expect revenue of $40 millionto $46 million, including approximately $4 million from MDL. Net of MDL, thisforecast is in line with our prior topline full year forecast for Symyxstandalone. Please note we exclude approximately $15 million in deferredrevenue from MDL for the quarter, we cannot take the revenue under U.S. GAAP.

Our fourth quarter is traditionally Tools heavy and this oneis no exception. With several high-value shipments due in Q4 and a continuingaudit of MDL financial information, we have kept our 2007 Q4 revenue rangesomewhat broad. At present, we have approximately $30 million in committedrevenue we expect to recognize during Q4 and approximately $8 million inadditional tools deals at contract stage.

For the fourth quarter, we expect a loss per share of $0.37to $0.29, reflecting lower revenues, as a result of the $15 million orapproximately $0.27 per share, and deferred revenue from MDL for the quarter wecannot take to revenue under U.S. GAAP.

Approximately $0.10 per share in the MDL acquisition relatedIP R&D write-off, one-time restructuring charges of approximately $0.06 pershare, amortization of intangible assets related to previous acquisitions of$0.02 per share and to the MDL acquisition of approximately $0.06 per share.

Stock based compensation expense of approximately $0.03 pershare and lower interest income of approximately $0.02 per share due to thepurchase of MDL. At present, we are assuming a tax benefit rate of 30% due tonon-deductible IP R&D charges in Q4.

For the full year 2007, we expect revenue of $116 million to$122 million again including approximately $4 million from MDL and excludingapproximately $15 million in deferred MDL revenue we cannot take to revenueunder U.S. GAAP.

For the full year 2007, we expect diluted earnings per shareof approximately $0.30 to $0.38, reflecting the items discussed for Q4, withthe following full year changes, amortization of intangible assets related toprevious acquisitions of $0.07 per share and to the MDL acquisition ofapproximately $0.06 per share and stock-based compensation expense for the yearof approximately $0.13 per share.

At present we are assuming a full year 2007 tax rate ofapproximately 38%. Focusing now on 2008, we have made great progress in the fewweeks since closing MDL, developing a comprehensive operating plan for all ofour businesses for next year.

At this early stage, we can provide an initial baselineestimate of 2008 revenue, which captures committed revenue, plus other revenuesin which we have a high degree of confidence.

As of today, our revenue of estimates for fiscal 2008 is$160 million, excluding approximately $11 million in MDL deferred revenue,which we will not be able to recognize in 2008 under U.S. GAAP. This estimatealso reflects an approximately $20 million decline in collaborations revenuefrom 2007 levels caused largely by expected reductions in ExxonMobil and theexpiration of certain other smaller collaborations in 2007 and 2008.

We believe this estimate is a solid base from which we canbuild in 2008. Fiscal 2008 revenue upsides include new license revenue fromSymyx's recent release of the Isentris 3.0 platform, new revenue from ourexpanding Electronic Lab Notebook product portfolio and synergistic sales ofLab Execution and Analysis applications at Tools, increased software consultingrevenues, new revenues from the company's recently launched Research Servicesoffering, Tools upside the plan and revenue opportunities with potentialstrategic partners.

To estimate 2008 earnings, we must first finalize MDL'sfinancials, complete budgetary planning for all of our businesses, complete ournegotiations with ExxonMobil and Dow and see the results of a number of otherefforts and initiatives for Q4. We look forward to providing furtherinformation following the end of our fiscal year.

Thank you. And Isy and I are available to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) First up is Avinash Kant fromBroadpoint Capital.

Avinash Kant - Broadpoint Capital

Good afternoon, Isy and Rex.

Isy Goldwasser

Good afternoon.

Rex Jackson

Good afternoon.

Avinash Kant - Broadpoint Capital

Several questions. I'll start with a few. You talk aboutrevenue guidance for the next year roughly $160 million. Could you give us yourassumptions in terms of how much are you recognizing, you think would come fromthe Symyx side and how much is going to come from the MDL side?

Rex Jackson

Well, first of all, one thing you should definitely pick up,we are avoiding pro forma representations of our financial results, butcertainly you should look at our business, nothing that our run rate would behigher, if not for the loss of deferred revenue. So you should look at thosetwo together.

Avinash Kant - Broadpoint Capital

Okay. So if you didn't have to defer those revenues, what I'mtrying to get is that do you think MDL revenues alone would have grown from the'07 numbers that you have talked about?

Rex Jackson

I think, as we forecasted some time ago, I think areasonable placeholder for what's in this baseline estimate for all of Softwareis 100.

Avinash Kant - Broadpoint Capital

That's all of Software.

Rex Jackson

It's 100, but you have to take that back to 89, reflectingthe $11 million loss.

Avinash Kant - Broadpoint Capital

Okay. Absolutely. And one more thing that I was a bitconfused about, in the past you have talked about roughly 60% to 80% --renewing the ExxonMobil contract at roughly 60% to 80%, you seem to be doing abit better there. You're talking about 70% to 80% this time. Now, if I remembercorrectly, Exxon, roughly, is running around %40 million or so annual run rateand if you were to -- the worst case scenario, if you were to use -- lose 30%of that, that comes to roughly $12 million. So I'm trying to understand if theadditional $8 million loss is coming from other contracts is that a good mathor…

Isy Goldwasser

Let me answer that. This is Isy. First, ExxonMobil thisyear, the run rate is forecast to be closer to the mid-30s rather than 40, soyou'd have to take 70% to 80% of that number. And of course that includesTools, Software and Research, all of it, and Licenses, all of that is combinedto reach that level. And we have made good progress, so we feel more confidentabout tightening the range, which is why we did so.

Avinash Kant - Broadpoint Capital

Isy, I must have been confused, because you said they'regoing to run it around $30 million this year, right? And you would renew it atroughly 70%. So basically you would lose 30% of the revenue in the worst-casescenario that's only $9 million. How do you get to 20?

Isy Goldwasser

Well, there's a mix of collaborations revenue, which isservice-based revenue in the labs versus Tools. I can tell you at a high levelthat ExxonMobil will be a little stronger in Tools next year than they werethis year, but substantially lower in Services base revenue next year than thisyear. So there is some offsetting going on there. So when we say $20 milliondown in collaborations revenue, we're focused on collaborations excludingTools.

Avinash Kant - Broadpoint Capital

I see.

Isy Goldwasser

Right. So the number in collaborations proper is bigger thanyour back calculating.

Avinash Kant - Broadpoint Capital

Okay. So when you say $30 million this year, that's just thecollaborations side or no overall?

Isy Goldwasser

No overall, mid-30s is what we expect from ExxonMobil thisyear overall total.

Rex Jackson

Right. So think mid-30s adjusted back the 20$ to 30%, that'sall revenue, but recognize that there's a much bigger hit happening incollaborations, which is being partially offset by Tools.

Avinash Kant - Broadpoint Capital

I see. Got it. That makes sense. And you are not in aposition to talk about EPS in any way, whether you'll be profitable or not atleast in calendar year '08 on an EPS basis?

Rex Jackson

Not as we sit here today and it's no more complicated thanwe've owned MDL for about three weeks and we've got to rebuild historical andthen obviously map that to our estimates and expectations going forward. Anduntil, we actually complete that, it's just not feasible to give '08 bottomline guidance. Also it's driven heavily by, as you could imagine, by thetopline. And what we tried to do today is to give you a sense of a baseline andbetween now and the end of the year and the next time we give guidance it'sincumbent on us to tell you what's above that number.

Avinash Kant - Broadpoint Capital

And lastly, if I may, is it safe to assume that given thenumbers you have given us, by the end of Q1 your cash position would be roughly$15 million to $20 million, is that a reasonable assumption?

Rex Jackson

Depending on the timing of payments -- I'm sorry, you'reasking for the Q4 balance or the Q1 balance?

Avinash Kant - Broadpoint Capital

By the end of Q1 '08?

Rex Jackson

Okay. So, we're going to go down substantially in Q4. I'dsay the lowest we would expect it to go is into the teens, but that assumes thatall of the things we think we have to pay for we have to pay for quickly. Itwill rebound in Q1 and depending on the timing of renewals and payments andpayment terms, etcetera. So in the month of February, March and April, wesubstantially restore our cash balances to a better operating level and then ofcourse it decreases after that. So depending on when you measure it you'relooking at somewhere between 50 and 70 as a recovery point, it's just aquestion of when it's measured.

Avinash Kant - Broadpoint Capital

50 and 70?

Rex Jackson

Right, but that may not be, that maybe a February, March oran April figure. It may not cut cleanly at the quarter.

Avinash Kant - Broadpoint Capital

Okay. But it will be in the teens by the end of Q4 though?

Rex Jackson

In the worst-case analysis that's true.

Avinash Kant - Broadpoint Capital

Okay. Thank you. I’ll let other people questions.

Operator

Our next question will come from JPMorgan, Jeff Zekauskas.

Jeff Zekauskas – JPMorgan

Hi, good day. In the nine-month numbers you gave us for MDL.Do they show an improvement over the nine-month numbers of 2006? In other wordsthe revenue of 58.4 and the operating income of 5.3. What are the year-agonumbers to that? Like, are we growing, are we shrinking, are we staying thesame?

Rex Jackson

It's a slight decline from '06 to '07 period to period ofapproximately $2 million bucks.

Jeff Zekauskas – JPMorgan

About $2 million bucks and are the revenues ratable over thefour quarters or is there a weighting to any of the particular quarters?

Rex Jackson

A couple of things, first of all, I'll tell you from aprofitability standpoint, the nine month numbers currently are better than theywere last year. So that's certainly an improvement. I would say that the vastbulk of the revenue is ratable under the financials as we have converted themto U.S. GAAP, is there some bumpiness in Q4? I honestly don't know that yet,because we haven't lived through this before under our accounting practices.There might be some Consulting that could be backend loaded. But we're stilldigging through that.

Jeff Zekauskas – JPMorgan

Okay, that's helpful; do you have any understanding of whatyour taxes will be like in 2008 or is this a tax advantage transaction or a taxdisadvantage?

Rex Jackson

In answer to your first question, clearly our taxexpectations for next year are really driven by our conclusions on the bottomline and since we haven't formed those yet, it's very, very difficult to do,but I would not say that this is a tax advantage transaction specifically, no.

Jeff Zekauskas – JPMorgan

In other words, what do you expect your effective tax rateto be on whatever it is you

earn next year?

Rex Jackson

35 to 40% would be a fair placeholder deferred tax rate.

Jeff Zekauskas – JPMorgan

Okay, and in terms of the 20 million in lost Collaborationsrevenues. What's the margin on that?

Rex Jackson

It depends on which components you're talking about, werethere certain…

Jeff Zekauskas – JPMorgan

The 20 that you subtracted out, those components. In otherwords, if you say you're going to miss 20 million and what they are inCollaborations. How does that affect operating profit?

Rex Jackson

I would say that the margin on the FTE components issubstantially lower than the margin on fee components and the fee componentmargin is quite high. The others have not run an average calculation acrossthat 20.

Jeff Zekauskas – JPMorgan

The reason I'm asking is essentially you're saying you'recutting out $20 million in cost by laying off some people.

Rex Jackson

Yeah.

Jeff Zekauskas – JPMorgan

And losing $20 million in revenue and so what I want to knowis what's the net effect of that?

Rex Jackson

The net effect of that is positive, but to plug a number, wedon't have that yet.

Jeff Zekauskas – JPMorgan

In terms of the Borealis deal that you signed, is thatalready in your guidance for next year?

Rex Jackson

Yes, substantially all of that deal is, not substantially,very high percentage of that deal is '08.

Jeff Zekauskas – JPMorgan

Okay, what's your committed revenue for the remainder of'07?

Rex Jackson

30, including MDL.

Jeff Zekauskas – JPMorgan

30 including MDL. What is it excluding MDL?

Rex Jackson

26 and change.

Jeff Zekauskas – JPMorgan

Okay. And then lastly, when the 124 people leave. What dothey do for a living or what did they do for a living in the combined entity?

Rex Jackson

You mean, from whence did they come?

Jeff Zekauskas – JPMorgan

What do they do? Why don't you need them anymore?

Rex Jackson

Well, I need, and so, as we said in the scripted remarks,there was a combination of two different pieces to that puzzle, right. One wasoverlap in development and the rest was a desire to look at our overallcorporate operations, and make intelligent choices as we are transitioning ourcompany into a very different type of company; so, it was predominantly overlapin the Software organization, corporate operations. It did not impact Tools orthe Collaborations group at all.

Jeff Zekauskas – JPMorgan

Okay. And then lastly, when you have your description of thefull-year 2007 earnings of $0.30 to $0.38, that also includes $0.74 gain, isthat right?

Rex Jackson

Yeah. That's right.

Jeff Zekauskas – JPMorgan

Okay. Thank you very much. Thank you for your patience.

Rex Jackson

No problem.

Operator

We have a question now from Dan Leonard with First Analysis.

Dan Leonard - First Analysis

Hi there.

Rex Jackson

Hi Dan.

Dan Leonard - First Analysis

I think I've got some of the same questions some of theother callers had. But I just didn't fully understand the answers. So, on your2008 outlook of a baseline of 160 million. How much of that is Symyx versus howmuch of that is MDL?

Rex Jackson

So, we obviously didn't break it down that way. The answer Igave to the earlier question was our 100 estimate for Software broadly definesMDL plus Symyx is a good number. But you have to back out of that number the 11in deferred, right?

Dan Leonard - First Analysis

Sure.

Rex Jackson

The balance is Symyx. So I guess your question is, how wouldyou subdivide the 89 net of deferred between Symyx and MDL? Is that yourquestion?

Dan Leonard - First Analysis

Correct. So I guess that would be the question.

Rex Jackson

Yeah. I mean, the Symyx business is going to be, as abaseline, mid 20s. But obviously as we described, it is a baseline number.

Dan Leonard - First Analysis

Wouldn't that imply that that MDL business deteriorates alot, quite a bit in 2008?

Rex Jackson

Again, it implies that as we look at committed and highconfidence revenue. As we're sitting here in advance of Q4 bookingsexpectations, we're not forecasting that upside right now.

Dan Leonard - First Analysis

Okay. I guess that leads me to my next question. If youitemize a laundry list of sources of upside to the 160 million number. Can youmaybe help me better understand, give me some perspective about the magnitudeof what these various items of upside could be, you know, what kind of rangewe're even looking at?

Rex Jackson

Well, that's actually something we've tried hard not to dotoday. I don't think we're in a position to give full '08 guidance. We want tojust try to provide people some visibility into MDL and what we bought and somevisibility into what we know we can see for next year, given that for examplepeople know that the ExxonMobil main contract does run off midyear.

But again, it's October. We've got a big Q4 ahead of us interms of Tool shipments, negotiations with Dow and ExxonMobil and a few otherthings that we need in order to put finish on our ultimate range. But we didwant people to understand, you know, here is a baseline that we feel very goodabout executing against and beating. Very difficult to quantify though.

Dan Leonard - First Analysis

Okay. And then I guess with Exxon as well. I was a littlesurprised that if Exxon revenue is going to be down $10 million in 2008 thatthere's another $10 million decline from other Collaborations which aresmaller. Am I just missing something there or, because Exxon and Dow were themajority of your Collaborations business, so I'm just a bit surprised that theothers totaled $10 million. And are they just going away completely or what'sthe dynamic behind these other deals that are falling off the table.

Isy Goldwasser

Dan, again. What Rex mentioned before is the way to thinkabout this correctly is you take the 70 to 80% of a mid-30s number, which is atotal amount we're expecting to receive from ExxonMobil this year, and what'sactually happening next year is ExxonMobil Tools revenue is increasingmaterially over this year and it's absorbing some of the decline of theCollaborations component. So, the decline in ExxonMobil Collaborations isgreater than $10 million next year.

Dan Leonard - First Analysis

But the total decline would be about $10 million or roughly,depending on if you used 70 to 80%.

Isy Goldwasser

$10 million for total revenues from ExxonMobil, but thatamount is greater than $10 million for the Collaborations portion of ExxonMobiland the difference is made up by a stronger Tools revenue component next year.

Dan Leonard - First Analysis

Sure. I'm not so concerned about what bucket you put it in.I'm looking at the overall number. And all I'm saying is there's an additional$10 million in the overall number from Collaborations, or maybe that's myanswer that you're just talking about a $20 million decline and that specificof bucket of Collaborations revenue? Is that?

Rex Jackson

That's right.

Dan Leonard - First Analysis

Now I understand.

Rex Jackson

That's right. So it's more than 10 for ExxonMobil in thatbucket, partially offset by more Tools revenue from ExxonMobil in a differentbucket.

Dan Leonard - First Analysis

Okay. So it's not a $20 million in the overall partnershipbusiness, assuming that…

Rex Jackson

That's right.

Dan Leonard - First Analysis

Okay. And then my final question, Rex, for the fourthquarter, if I wanted to look at your guidance range on an apples to applesbasis with the fourth quarter a year ago, what's my EPS range?

Rex Jackson

Let me make sure I understand the question. I thought youwere going to ask a different question, which is if you factor out MDL andeverything else, where would we be relative to our guidance for this year as aSymyx standalone or are you doing a look back to '06?

Dan Leonard - First Analysis

Well, I would ideally like something that I could compare tothe current Street estimate. And whatever you can do to help me to get therewould be terrific.

Rex Jackson

I can give you a specific number offline. I will tell youthat we are, again. If you factor out all of the litany of acquisition relatedand other charges. We are on track to meet the estimates and frankly to dobetter than the midpoint of the range of the estimates we've given you already.

Dan Leonard - First Analysis

Okay.

Rex Jackson

Symyx standalone. So, the underlying business is performingas expected, we've just complicated matters significantly.

Dan Leonard - First Analysis

Okay. Thank you.

Operator

Our next question comes from Jonathan Palmer with ThomasWeisel Partners.

Jonathan Palmer - Thomas Weisel Partners

Hi Rex.

Rex Jackson

Hi Jon.

Jonathan Palmer - Thomas Weisel Partners

First question is for Isy. How long do you anticipate theintegration taking?

Isy Goldwasser

Well, I certainly expect that we'll get through the majorityof the integration in the fourth quarter. That's certainly been the plan andthe expectation.

Jonathan Palmer - Thomas Weisel Partners

And then, do you have a general sense in terms of when thecombined software unit will go profitable? Is it an '08 event?

Rex Jackson

I think what Isy said in his remarks is a true statement.And that is, once we -- the limiters today is we've got to burn off thedeferred revenue and the loss of just all that top line revenues as you canimagine, makes that difficult.

But at a normalized, no deferred revenue loss basis, thesoftware business is in very good shape.

Jonathan Palmer - Thomas Weisel Partners

Okay. And then how do you anticipate reporting financialresults next year? I mean, the company made a transition to going fully GAAP.

Are we going to go back to non-GAAP financials?

Rex Jackson

I'm bending over backwards on this call not to go there, asyou can probably tell. I prefer strongly to give GAAP numbers and then to givepieces of the puzzle, if people choose to take some things out. So at leastgive you the pieces to work with.

But I don't anticipate going pro forma next year. I'd liketo do it this way this quarter, then next quarter and after that it will becomean increasingly less interesting piece of the puzzle.

Jonathan Palmer - Thomas Weisel Partners

Of course. And then, can you give us a sense of what thegross margins are on the MDL business? Even a range is fine.

I mean, I can look at the historicals from 10 years ago andit looks like 80s gross margin, I just want to know if that's still around acomparable level today?

Rex Jackson

Yes. I mean I'm only hamstrung, by the fact, I don't havethat level of detail with me. I've got, obviously, the top line numbers and theoperating numbers.

Isy Goldwasser

I think it's certainly in the mid-70s to mid-80s would bethe right range.

Rex Jackson

It's not wildly inconsistent with history. That much weknow.

Jonathan Palmer - Thomas Weisel Partners

Okay. And in terms of that deferred revenue, I assume yourecognized the cost associated with that, either way?

Rex Jackson

Right. Yes, it's the worst…

Jonathan Palmer - Thomas Weisel Partners

The worst of both worlds.

Rex Jackson

It's losing your cake and whatever the food side of theother one would be to make that perfectly backwards.

Jonathan Palmer - Thomas Weisel Partners

And then, in terms of your restructuring, can I get a senseof what, I guess, your base pro forma cost base is?

Just doing some quick back of the envelope math, I'm comingto around $160 million in operating expense in '07. Is that in the rightballpark?

Rex Jackson

Did you say 116?

Jonathan Palmer - Thomas Weisel Partners

160.

Rex Jackson

160. We don't have that high a number.

Jonathan Palmer - Thomas Weisel Partners

I'm just trying to get a sense of what that $20 million iscoming off of.

Rex Jackson

Well, if you load it up -- to be honest with you, we don'thave that figure handy. My apologies.

Jonathan Palmer - Thomas Weisel Partners

Okay. Not a problem.

Rex Jackson

Yes, but I assume what you'd like to do if we can work thatout for you, is you'd like to -- because you'd said operating -- you meanoperating net of the charges?

Jonathan Palmer - Thomas Weisel Partners

Yes.

Rex Jackson

Okay. So, we can get that to you.

Jonathan Palmer - Thomas Weisel Partners

Okay

Rex Jackson

And the only issue -- I can give you a sense of Symyxstandalone that will be easier, and giving you the real baseline estimate forMDL might take a long time.

Jonathan Palmer - Thomas Weisel Partners

Okay. Well, thank you very much for taking my question.

Rex Jackson

All right. Thank you.

Operator

(Operator Instructions) Up next is Nollenberger Capital'sBill Gibson.

Bill Gibson - Nollenberger CapitalPartners

Hi. I'd like to follow-up, Rex, a little bit on Jonathan.Due to this $0.27 that it's costing us, that's essentially the cost of the MDLSoftware, but not recognizing the revenue, is that correct?

Rex Jackson

It's a tax-effected number reflecting the loss of revenue.And obviously, all the costs are embedded already.

Bill Gibson - Nollenberger CapitalPartners

Yes. And does that go in the cost of products sold? Or wherewould that show up building it into a model?

Rex Jackson

Yes, cost.

Bill Gibson - Nollenberger CapitalPartners

Okay. And along that same line, I guess, I'm a littleconfused, MDL, when you people renew next year, we're going to have deferredrevenue, right?

I mean, where you get paid up front and then realize it overfour quarters?

Rex Jackson

That's right. I mean, the issue we have this year is thatthey always get renewals at the beginning of the year, big deferred revenuebalance, because they get a lot of cash in upfront, and then you work off thedeferred revenue during the year.

If once the deferred revenue is accrued on our watch whilewe own the company, it's not an issue for us from a financial reportingstandpoint. It's the loss of deferred through the acquisition, that's theproblem.

Bill Gibson - Nollenberger CapitalPartners

Okay. Yes. Maybe we can talk offline about that. We'regetting in to nuances I don't understand, I guess.

Rex Jackson

No problem.

Bill Gibson - Nollenberger CapitalPartners

Yes. A different question, Isy. On these cutbacks that youannounced, the 124 people, you talked about an overlap in development. Are youcutting too much into the bone of MDL?

I mean, these guys just came out with a new softwareproduct, Isentris 3.0 and I understand a lot of that development team is partof that group that's going.

Isy Goldwasser

We certainly built an operating plan for success for thesuccess of the software business and we still are going to have over 200developers in terms of horsepower here.

So when we say overlap, it really was a case of looking atthe entire business, the set of products and looking at the right structure forthe business going forward to give it a foundation, so that it would beprofitable, it would be growing over time.

Bill Gibson - Nollenberger CapitalPartners

Okay. So at least you attempted not to cut into the bonehere of the people?

Isy Goldwasser

It's always a painful step to take and not an easy one whenorganizations are used to working in a mode for decades.

But one that I think was necessary and going forward, I'mreally very excited, I think other people are too, about the organization andits potential.

Bill Gibson - Nollenberger CapitalPartners

I was pleased to see you took the action quickly. One lastquestion, I understand your guidance on the base revenue, but let's jump outsix months.

We're six months down the road; we've got a new businessmodel that has the Research Services piece. Are you going to be disappointed ifwe haven't picked up any Research Services customers there and at that point,do you start laying off people?

Isy Goldwasser

Yes. I'm definitely focused on strong execution, strongexecution across the areas that Rex mentioned, so we could lift our top line.Performance next year is really critical. He mentioned Software bookingsrelated to Isentris and to Symyx Notebook. He mentioned negotiations withExxonMobil and Dow. He also mentioned strategic partnerships, adding one atleast, and I would say in the first half of the year as a target. And ResearchServices, as a business being established, as well as Tools bookings that wewould have to secure in the next six months.

And so, all those things are really needed to drive ourconfidence level higher and to be able to drive our revenue and top line higherfor next year. And that clearly is what we're organized to do. But until we doit, the baseline is where we expect to be, and we want to be open withinvestors and clear about the situation.

Bill Gibson - Nollenberger CapitalPartners

Oh, no. I can appreciate that. I was just putting on myoptimist hat. Thanks, Isy.

Operator

Our last question today comes from Lynn Wanger (ph), WilliamHarris Investments.

Lynn Wanger - William Harris Investments

I appreciate you taking my calls here. A couple of myquestions have been asked already, but let me go with a couple of more here.

When you talk about the revenue top line number for nextyear, for '08, how much in that is from databases being resold from Elsevierand the CrossFire related databases?

Rex Jackson

I'm sorry, Lynn. Can you ask that question again?

Lynn Wanger - William Harris Investments

Sure. As you look at the top line number for '08, how muchis in that number from some of the reselling of the Elsevier owned databases,the (inaudible) and the Beilstein?

Rex Jackson

Well, I think you're suggesting a business relationship thatwe won't actually have. That would be suggesting that we're a distributor?

Lynn Wanger - William Harris Investments

I thought there was a relationship to resell some of thedatabases that are part of CrossFire?

Rex Jackson

No. The nature of our relationship going forward is that wewill have a exclusive ability to continue providing our customers' access toElsevier's content post-close for a stated time period.

They can't build in their databases to other people'sdesktop solutions to compete with us. So we're preserving the customerexperience, but we are splitting the revenue as opposed to bolting it onto us.

Lynn Wanger - William Harris Investments

Got it. Appreciate the clarification. Do you have an ideawhat the depreciation and amortization will look like in Q4 and ongoing?

Rex Jackson

For the combined company?

Lynn Wanger - William Harris Investments

Right.

Rex Jackson

Yes. As I hope I suggested earlier, any time we have to givethat kind of detail for MDL. We're going to be discomforted I think at thisstage. We're probably another seven to eight weeks from having, at a minimum,audited financials for MDL, which provide us the historical baseline againstwhich to measure the go-forward.

And we're also doing system changes everywhere. We've got anenormous amount of work to do to really feel comfortable giving out numbersbelow the line that includes that.

Lynn Wanger - William Harris Investments

All right. I appreciate it.

Operator

Thank you everyone for joining us today for the SymyxTechnologies third quarter 2007 financial results conference call. That doesconclude today's conference. We thank you all. Have a great day.

Isy Goldwasser

Thank you.

Rex Jackson

Okay. Thank you.

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