Executives
Peter Dworkin - VP of IR and Corporate Communications
Tony L. White - Chairman, President and CEO
Mark P. Stevenson - President and COO
Dennis L. Winger - Sr. VP and CFO
Analysts
Tycho W. Peterson - JPMorgan
Doug Schenkel - Cowen and Co.
Quintin Lai - Robert W. Baird
Jonathan P. Groberg - Merrill Lynch
Derik De Bruin - UBS
Dan Leonard - First Analysis
John Sullivan - Leerink Swann
Peter Lawson - Thomas Weisel Partners
Applied Biosystems (ABI) Q4 FY08 Earnings Call July 24, 2008 11:00 AM ET
Operator
Good morning. My name is Eric, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Applied Biosystems' fourth quarter fiscal 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. Following the speakers' presentation, there will be a question-and-answer session. [Operator Instructions].
I would like to introduce Mr. Peter Dworkin, Vice President of Investor Relations and Corporate Communications for Applied Biosystems. Mr. Dworkin, you may begin your conference call. Please proceed.
Peter Dworkin - Vice President of Investor Relations and Corporate Communications
Thank you, operator. Good morning everyone. Thanks for joining Applied Biosystems management today to discuss the fourth quarter and full-year fiscal 2008 financial results that we issued earlier this morning. Present with us today from Applied Biosystems are Tony White, Chief Executive Officer; Dennis Winger, Chief Financial Officer; and Mark Stevenson, President and Chief Operating Officer of Applied Biosystems Group. Also here today are other senior managers and Bill Craumer, Investor Relations Director.
During this call, we'll be making forward-looking statements about Applied Biosystems' business. These statements are subject to the risks and uncertainties relating to our business that are referred to in the releases issued this morning and in our filings with the SEC. We also will be discussing historical and forward-looking non-GAAP financial measures. These non-GAAP financial measures are not in accordance with or an alternative for GAAP and may be different from non-GAAP financial measures used by other companies. A reconciliation of GAAP and non-GAAP financials can be found in today's press release and on the Financial Reports page of the Investor Relations section of the Applied Biosystems website, which is at www.appliedbiosystems.com.
On June 11, 2008, we entered into a definitive merger agreement with Invitrogen Corporation pursuant to which Invitrogen will acquire all of the outstanding shares of Applied Biosystems stock. In connection with the proposed merger, Invitrogen will file a registration statement on Form S-4 with the SEC that will include a joint proxy statement of Applied Biosystems and Invitrogen. Invitrogen said this morning that it expects to file the registration statement by the end of July or early August. Applied Biosystems and Invitrogen will mail the joint proxy statement to their respective stockholders after it is declared effective by the SEC. You are urged to read the joint proxy statement when it becomes available because it will contain important information.
And now I'd like to turn the call over to Tony White.
Tony L. White - Chairman, President and Chief Executive Officer
Good morning, everyone. Thanks for joining us. This was a solid quarter for Applied Biosystems, with good growth in consumables and services and actually terrific growth in our Asia Pacific region, which in our management structure excludes Japan. In this area, revenue increased 42% over the prior year quarter. These particular results reflect the investments that we have been making in those areas of our business. Instrument revenues were also up compared to the prior year.
We delivered a nice percentage increase in other revenue, up 13% compared to the prior year quarter. If you've read our earnings release, you may have observed for that for the first time, we've given a little more detail to the composition of our other revenue portfolio, as investors have recently asked about this. The other revenue category is primarily our service business and income from our patent estate. In the release, we disclosed that $24.5 million, or 4% of total revenues, in the fourth quarter came from patent royalties and license fees, and within this other revenue category, service revenues are more than three times the royalty and license revenues. For fiscal 2008, the royalty and license income was 4.5% of total revenue.
During the quarter, we continued to control expenses, and earnings per share performance sustained the trend established throughout the fiscal year, with double-digit growth. On July 1, we completed the separation of Celera business from Applera. Celera is now an independent company. Applied Biosystems and Celera will do business together following principles that they've agreed to as part of the separation process. With the separation, Applera no longer operates under its former tracking stock structure, and we have changed the name of the remaining company to Applied Biosystems, Inc.
I will now turn the call over to Mark Stevenson to talk about the quarter.
Mark P. Stevenson - President and Chief Operating Officer
Thanks, Tony, and good morning to those of you on the call. First, I'd like to comment that planning activities looking ahead to the integration of Applied Biosystems and Invitrogen are progressing very well, with multiple teams working towards a smooth start on day one of the new company.
I'm going to now turn to start my comments on the quarter with a high-level commentary about each of our specific product lines and platforms. Today, I'll focus particularly on SOLiD and, given that it's the end of our fiscal year, provide significantly more color than usual about its success and traction in the marketplace.
Last quarter we said that given continued development of our SOLiD platform, we expected to see our DNA sequencing segment resume its role as a contributor to Applied Biosystems growth. With that framework, let me confirm that the SOLiD development and commercial teams have executed on this plan and as a result, our DNA sequencing business enjoyed nearly 10% growth in the fourth quarter.
In the beginning of May, we started shipping SOLiD 2.0, a major upgrade to our initial platform and one that offers the highest throughput, accuracy and scalability of any next-generation system and platform that's available today. The accuracy and throughput have been demonstrated in the marketplace by customers, the only testing ground that really matters. With the throughput specification of SOLiD 2.0, we have a 6 gigabases of what we call mappable DNA data per run, some customers have reported nearly 15 gigabases of throughput and internally, we have generated runs exceeding 20 gigabases, underscoring the scalability of our platform. In addition, we have now upgraded all previous installations to SOLiD 2.0 capability.
SOLiD system sales and installations have been distributed broadly across the globe and across a range of facility sizes. We have secured nearly 100 orders to date, and about 75% of them are outside the major genome centers, meaning at core sequencing facilities at universities, specialized institutes such as cancer research centers, and commercial service labs. With the introduction and market acceptance of SOLiD 2.0, we believe that we are now winning about 40% of new orders for next-gen sequencing and over 50% in some geographies.
In addition to throughput and accuracy, we believe that the SOLiD systems yield industry-leading performance in key application areas that we expect to grow strongly in upcoming years. One such area is the study of cancer, probably the single most complex disease and the subject of extensive public and private funding to understand the genetic basis of its cause and development. The SOLiD platform offers superior capability for what is called mate-pair analysis. In a nutshell, our mate-pair analysis enables investigators to detect and accurately map the complete spectrum of genetic variation in the genome. And this not just single nucleotide polymorphisms or SNPs, but also insertions, deletions, long repeat sequences and other chromosomal abnormalities that are so characteristic of cancer.
Our system can map repeat sequences up to 12,000 bases long, up to five times longer than competing systems, which is critical for accurate sequence assembly. Applied Biosystems is collaborating closely with the Wellcome Trust Sanger Institute, and other leading researchers and institutions to gain a more complete understanding of cancer and the cancer genome. In time, this should enable development of new cancer diagnostics and more effective therapeutic approaches.
The power of the SOLiD platform as a breakthrough discovery tool has also been demonstrated in applications aimed at understanding gene expression patterns. When the human genome project was completed in around 2000, most scientists believed that just 30,000 genes or so, a very small fraction of the human genome, was actually transcribed into RNA and then translated into amino acids and proteins. The rest of the genome was considered junk DNA.
Just eight years later, life science researchers now believe that between 80% and 90% of the genome is transcribed into some sort of RNA, including a range of small and micro RNAs, many of which play important regulatory roles that determine which genes are turned on and off in different cells and disease states. Unlike microarray-based approaches to gene expression analysis, the SOLiD platform enables researchers to look very broadly at the totality of RNA transcripts, known as the transcriptome.
One of our customers recently published a paper describing how his research team used the SOLiD system to develop and perform sequencing-based transcriptome profiling. This type of technique will help researchers identify distinguishing features in the genetic makeup of cells and better understand, for example, how breakdowns in the molecular pathways can lead to complex diseases. This was one of three papers published during the fourth quarter based on data generated on the SOLiD system. We expect to see many more publications going forward.
We are gearing up for SOLiD growth in fiscal 2009 and beyond and we have ramped production capacity. We now have the ability to assemble and ship systems on an unconstrained basis to meet demand. In addition to new SOLiD-optimized sample preparation and labeling products, we plan to introduce during fiscal 2009 automation tools and other innovations to further improve SOLiD workflows and ease of use. We plan to sustain and build on our 40% win rate going forward.
Turning to the performance of our CE systems and consumables, in Q4 it was consistent with our expectations. Sequencing consumables revenue increased over the prior year, indicating that the use of our global installed base of CE systems continues to increase. And while the revenues from selling high-throughput CE systems declined due to the shift in the high-end market to next-generation sequencing, we sold more low-to-medium throughput instruments than in the prior year quarter. We believe this was due to the fact that CE technology continues to be the gold standard in commercial applications such as molecular testing and diagnostics, and forensics.
Trends in these commercial applications for CE sequencing continue to be positive. For example, the U.S. House of Representatives this month voted to reauthorize and increase funding of the Debbie Smith Act, which funds forensic sequencing by law enforcement agencies. Additionally, the U.S. government is drafting policies for taking DNA samples from suspects arrested for federal crimes, as well as from illegal immigrants detained at the U.S. borders. The FBI estimates that the new immigrant program will add 1 million new samples annually to the U.S. criminal DNA database, which currently has DNA profiles on file.
We are extremely pleased with the 15% growth in the fourth quarter in the real-time PCR and applied genomics product category. At 36% of revenue, this is the largest part of our portfolio, as well as the fastest growing. Included in this category are PCR-based research consumables such as our TaqMan assays, our Ambion products, and our consumables kits for DNA forensics, all of which generated very strong double-digit growth.
We are also encouraged by further sales gains of our MicroSeq kit for identifying bacterial and fungal contaminants in the manufacturing of biologics, drugs and vaccines. The revenues from these kits, which run on our CE sequencing machines, are also included in the real-time PCR and applied genomics category. We believe pharmaceutical manufacturing is an attractive area for growth and have a number of new products for this market in development.
The mass spectrometry product revenue category increased approximately 4% compared to the prior year. From a global segment standpoint, applied markets were strongest at double-digit growth, reflecting demand for applications such as safety monitoring of water and food. Our small molecule business grew modestly, and our proteomics business declined. As in the third fiscal quarter, cautious spending by pharma, which is not being offset entirely by strength among the CROs, and competitive offerings in proteomics were the main drivers in these segments. Geographically, results mirrored growth in key applications. We saw excellent growth in Asia, particularly in China where all three segments grew, and for the first time in a while, we had modest triple quad and QTrap growth in Japan. Sales were solid in North America, led by strength in applied markets, while pharma weakness hurt mass spec results in Europe.
From a product standpoint, Q4 saw continued strength in our QTraps and triple quad systems, which are predominantly used in pharmaceutical, applied market, and quantitative proteomic applications, and continued weakness in our accurate mass products used primarily in proteomics research. Mass spec is a capital equipment business, which therefore tends to be lumpy and driven by the introduction of new products. We plan to introduce new hardware before the end of the calendar year and throughout the next fiscal year to reinforce some of the software and workflow improvements that we launched in the fourth quarter and throughout fiscal year 2008.
I would like to summarize at a high level how we see the AB business performing over the next 12 months to supplement the fiscal 2009 outlook in today's earnings release. As in that outlook, the following statements assume current currency rates applied throughout the next 12 months, in other words, they include an expected benefit from currency. In DNA sequencing, we expect a single-digit decline in the CE sequencing offset by significant growth from SOLiD. We expect our growth from SOLiD to come from continued growth in the market for next-generation sequencing, as well as further gains in our market share.
In total, we expect modest growth in DNA sequencing revenues. We expect the share gains in next-generation sequencing will come from a host of factors, including the positive momentum from the 2.0 launch, customer references, more publications, new workflows for small RNA analysis and gene expression analysis, further system improvements, especially for sample preparation, and the reach and customer relationship of our global sales, marketing and field support organization.
We expect our diversified and dynamic real-time PCR and applied genomics product revenue category to continue to grow at approximately a double-digit rate, moderated in part by a decline in licensing fees. And we expect mass spec performance to improve with the introduction of new systems. Our two other product revenue categories, core PCR and DNA synthesis and other product lines, are mature businesses that generate healthy cash flow and support our growth businesses.
In fiscal 2009, revenue from royalties and licenses on our patent portfolio is expected to decline somewhat because we expect less income from granting new licenses than we had last year. The amount of royalty revenue should be similar to last year.
Now Dennis Winger will review our Q4 financial performance and discuss our fiscal 2009 outlook in more detail.
Dennis L. Winger - Senior Vice President and Chief Financial Officer
Thank you, Mark. As mentioned, our fourth quarter results were highlighted by solid revenue growth and continued strong EPS growth on both a GAAP and non-GAAP basis compared to the prior year quarter. Non-GAAP EPS was 29% higher than the prior year quarter. Gross margin in the fourth quarter of fiscal 2008 was 56.5% compared to 55.4% in the prior year quarter. The increase in gross margin was driven primarily by a favorable impact of foreign currency and lower enzyme costs partially offset by mass spectrometry pricing.
During the fourth quarter, SG&A expenditures increased 10% from the prior year level primarily due to the unfavorable impact of currency, as well as employee-related costs and regional investments in China and other fast-growing markets. R&D expenditures decreased 2% in the fourth quarter from the prior year period principally due to lower employee-related costs and the termination in June 2007 of a contract with the U.S. Department of Defense. Partially offsetting the decrease were investments in programs related to the SOLiD system. Fourth quarter fiscal 2008 earnings per share from continuing operations on a non-GAAP basis was $0.49, an increase of approximately 29% compared to $0.38 in the prior year period. Excluding foreign currency, non-GAAP earnings per share increased 13% over prior year. The accelerated stock repurchase program transaction was accretive to Applied Biosystems' fiscal 2008 earnings by approximately $0.02 per share. We did not make any open-market purchases of Applied Biosystems shares during the fourth quarter or since in the view of our proposed combination with Invitrogen. In the past five years, the company has repurchased $1.7 billion of Applied Biosystems stock.
The reconciliation of GAAP and non-GAAP financials can be found in today's press release, as well as on the Financial Reports page of our Investor website, www.appliedbiosystems.com. Cash flow from continuing operations during the fourth quarter was strong at $163.6 million, capital expenditures were $18.2 million. At the end of the fourth quarter, accounts receivable were $475.6 million, representing 58 days sales outstanding, and inventory was $161.8 million, representing 3.3 months of inventory on hand.
At the end of the quarter, cash and short-term investments were $543.2 million, up from $449.5 million as of June 30th, 2007. The increase was largely the result of cash flow from operations partially offset by the $162 [ph] million payment to Morgan Stanley for our accelerated stock repurchase transaction, a portion of which was funded with available cash and the balance of which was funded by $275 million in short-term debt. We repaid $175 million of these borrowings by the end of the fourth quarter and an additional $50 million since then, leaving $50 million in debt outstanding as of today.
Regarding Applied Biosystems expectations in its financial performance for 2009, I would refer you to today's earnings release. As noted, while the combination with Invitrogen is targeted to close during the fall of 2008, this outlook is provided as if we had not entered into a merger agreement with Invitrogen and Applied Biosystems remains an independent entity during all of fiscal 2009. This is in order for us to give our investors look at our expectations.
At current currency rates, we expect mid single-digit revenue growth, with revenues above the prior year level for both instruments and for consumables. We also anticipate growth in the DNA sequencing, real-time PCR/applied genomics, and mass spectrometry product categories and declines in core PCR and other product lines. We anticipate modest gross margin and operating margin improvements in fiscal 2009 compared to fiscal 2008. Finally, we expect non-GAAP EPS to increase faster than revenues. On a stand-alone basis, capital spending would be at an expected $60 million to $80 million.
We'll now be able to take your questions on Applied Biosystems.
Question and Answer
Operator
[Operator Instructions]. Your first question comes from the line of Tycho Peterson with JPMorgan. Please proceed.
Tycho Peterson - JPMorgan
Hi. Good morning. A quick question I guess maybe starting out with the mass spec business, I just wanted to get a little bit more color, I appreciate the growth you've seen in that segment this quarter, but with MDS doing some restructuring, I'm wondering if you can comment on the impact that may have to your business there? And then also your comment around pricing, has it materially gotten worse over the quarter in the mass spec business? Thanks.
Tony L. White - Chairman, President and Chief Executive Officer
Yes, Tycho, I can take that question. So, yes, MDS did announce some changes with the analytical technology. The goal of that that was not to affect product development activities nor innovation rather they were focused on the size and sort of restructure from their organization for high productivity and to help accelerate new products into the growing market. So, we work very closely with MDS on a day-to-day basis. We don't expect any impact on that with a lot of new products. So, that's the sort of answer to first part of your question. As regard to the second, it continues to be in an increasingly competitive market, it always has and we continue to say that. Having said that, we continue to compete well into the market that demonstrates, if you have the performance features, if you have the right applications reach the market, that you can maintain the prices. So, that's where we are focus on our product offerings and the innovation and we'll continue to do that.
Tycho Peterson - JPMorgan
Okay. And then with regards to your comments, Mark, on SOLiD. Can you just talk a little bit about where your customers are in terms of consumable pull-through at this point? And then, you said about 75% outside the major genome centers and then you highlighted, I guess, cancer research in some of the commercial service labs. Can you just give us a sense as to how it breaks out in terms of early demand outside the big genome centers?
Mark P. Stevenson - President and Chief Operating Officer
Well, firstly on consumables, our guidance continues to be that we expect the consumables throughput and run rate to be in the order of about $175,000, that kind of range. And... or we should take the royalty to customers together, up going and sort up and running, but that time is also coming down. I commented at the previous calls where generally we estimated about a quarter, current validation times to get systems in and down to about 60 days and improving. We have been streamlining the acceptance testing protocol and we're expecting to get revenue recognition down to about 30 days, following shipment, which has increased that consumable pull-through. With regard to the second segment, it's hard to break out further than we did. We wanted to give you color that this is a broadly diversified market, with my statement of the proportion outsize of the genome centers. We've particularly focused on whether those applications are drawing in new funding and that's why we particularly identified cancer, being a genetic disease, being just a complexity of it. We are seeing a lot of new funding coming into institutes to study that, as well as you say these applications, gene expression, where institutes are looking again at all that microarray gene expression-based and saying, well, we may have missed something first time around, so let's run those experiments on the next-generation sequencing and do this all transcript profiling. So, that's what's growing the demand outside the traditional sequencing centers and of course even new applications and market growth.
Tycho Peterson - JPMorgan
Okay. And then just one last one on real-time PCR in terms of the guidance you laid out. Are you factoring anything in here for BioTrove and some of the new form factors for genotyping, if they come here?
Mark P. Stevenson - President and Chief Operating Officer
Yes, we are. So, the BioTrove collaboration is going well and it's on track. And we'll anticipate introducing products during this fiscal year that would use the BioTrove format. We have just such a great wealth of assays and deploying them in different formats, you would have seen... this quarter we took some of the assays out and put them in more custom formatting and plating, which has helped a lot of our customers and the BioTrove format will allow us to go into this mid-density genotyping space where people have already started some trials through that customers, be it a drug metabolizing enzymes and some of the pharmaceutical customers albeit put that into a BioTrove format.
Tycho Peterson - JPMorgan
Okay, great. Congratulations on the quarter.
Mark P. Stevenson - President and Chief Operating Officer
Thanks, Tycho.
Operator
Your next question comes from the line of Doug Schenkel with Cowen and Company. Please proceed.
Doug Schenkel - Cowen & Co
Hi, good morning and thanks for taking my questions. Can you help us understand how you arrived at the 40% win rate on the competition for next-generation sequencing businesses? Could you just help us understand what's... I guess what's in the denominator there?
Mark P. Stevenson - President and Chief Operating Officer
It was a fairly simple math equation, which was... we know where the orders are going on during the last quarter. We are involved in overlap, we counted up the number of units we won. And counted up the numbers we lost to our competitors. So, it wasn't too complicated an analysis that we did. These units don't go on without as knowing about them in the market. We have a great level of reach into overlap and really the impact of 2.0. When we introduced that into the market, it generated a huge amount of buzz at the Cold Spring Harbor meeting. We just saw continued traction going up in the market going forward and that's what we saw in Q4 and so it would be nice to give a win rate out there to people to date where we are, clearly we've been very aggressive to make sure that our customers are fully supported in going through and have been very successful with the results there.
Doug Schenkel - Cowen & Co
And we appreciate you sharing the metric, and we too have heard more encouraging feedbacks sent to you rolled out the upgrade. I guess I just want to make sure you're winning 40% of the business you're going after, that's not necessarily an overall... an estimate of what's going on in general in the market?
Mark P. Stevenson - President and Chief Operating Officer
We think we know pretty well what's going on in the market. It's a time based, what happened last quarter... I mean the snapshot I mean clearly a year ago, we weren't even in the market, comparing a year ago to a year ago, just looking at what happened and it's looking at how many units got placed and how many units we placed and those are orders. So, that's how we did the calculation.
Doug Schenkel - Cowen & Co
Okay. And maybe one follow-up on SOLiD, there's been a lot of talk in the investment community, I think maybe more so in the investment community and the scientific community about ABI heavily discounting SOLiDs to get out there, to get them out into the market. Could you maybe address this directly and just, I guess, either confirm or deny that this is occurring and talk about how this has evolved since the upgrade?
Mark P. Stevenson - President and Chief Operating Officer
Yes, the major comment that I back and I agree with you, it's in the investment community, perhaps you're going to ask the customers and that's not what's happening, but the comment I back is that we are replacing systems for free and that's a false statement. What we have done is we placed a number of systems on consignment with the customers as part of collaborations that we directed it in publications and message development. Those customers pay for those units or will pay from back. This is normal practice when we take an industry and use any kind of disruptive technology as part of getting acceptance, or there has been contracts and deals associated with all that. And that's been a very minor part and in some of the area once we did, they have all translated into orders that we've had. So, that's a normal thing we've done and hundreds orders that we quote are real orders out there. They are not part of that placement, we would...
Tony L. White - Chairman, President and Chief Executive Officer
And that's very consistent with their bill practice, any new instruments that we launch. So, we frequently do that, we're expecting to develop applications, we then take other customers with old products that we saw in the application.
Doug Schenkel - Cowen & Co
That is tremendously helpful. On the deal, I think it's fair to assert that a merger such as that which is proposed between you and Invitrogen can't help, but at least be a little bit disruptive. And I know that's a bit leading, but I'm hoping that you might be able to talk a little bit about where maybe specific areas within your business where you're maybe more or less concerned about the potential for distractions and maybe share with us how the potential for those distractions are factored into your guidance?
Tony L. White - Chairman, President and Chief Executive Officer
Well, firstly your assertion is a correct one. I mean any large merger has the potential for disruption. And so we've gone into this with a very thoughtful process. We've worked closely with our colleagues at Invitrogen to think about how we want to view the timing. We've engaged with an outside body to like... to help sort of things bring best practice today and instead of a very formalized integration process. We targeted really the areas where we see opportunities for synergy and overlap. I mean we were just talking about SOLiD, I mean SOLiD is one of those areas where continued focus, continued business as normal. That's not an area where we're looking at potential overlaps, but where we see those overlaps, we put dedicated people on them and not there distracted in the day-to-day business and we are being thoughtful about it and making sure that as we come forward to a day one and potential... I mean together those two companies there, it's a trouble-free event. The integration also it will then continue over several years is when it will be completed on day one. So, we are being very thoughtful in that and careful to cause just the minimum disruption that we can. At the same time, we are making sure we can look for the synergies as we've outlined when the new companies looking at this combination. There are considerable synergies to be had, the integration team and the missions we set for these people were set aside for these integration planning is to go validate that and make sure that those synergies can be found and realized.
Doug Schenkel - Cowen & Co
That's helpful, and one last question, I'll get back in the queue. At least a couple of your competitors either today or over the last few days have talked about how they anticipate passing along the impact of some higher raw material customers' cost to their customers in the form of prices increases. I apologize if I missed this in your prepared remarks, but to the extent you haven't talked about that already. Can you just maybe pass along some thoughts about how you're planning the approach, any pressures you may be facing from higher raw material costs? Thank you.
Tony L. White - Chairman, President and Chief Executive Officer
Yes. We are certainly looking at those as well, particularly in the cost of freight which is increasingly a business moving from a more consumable business, there's a lot of shipments each day. And so that's been a major area of focus around freight. On the other side, I would say as much as we get increase at the moment here we have also done a tremendous job of sourcing that product, procurement group efforts in moving a lot of manufacturing also into Singapore, we are now sourcing areas of Asia where we continue to drive cost out. So, while we've got those two components going on, we are also mitigating that by some of that productivity improvement we have been doing in that manufacturing and supply chain operation.
Operator
Your next question comes from the line of Quintin Lai with Robert W. Baird. Please proceed.
Quintin Lai - Robert W. Baird
Hi, good morning. Congratulations on a nice end to your fiscal year. As you take a look at the forecast for fiscal 2009, could you tell us a little bit about some of the assumptions you're making for your end markets like big pharma, demand, and academic and biotech in applied markets?
Tony L. White - Chairman, President and Chief Executive Officer
Yes. I mean, at big pharma we've still found constrain in some of its spending. We are optimistic that at sometime we've seen these trends in pharma that we see these cycles come and go. And so, as it comes during the calendar year, I mean for the new calendar year for pharma, we've made a few changes in that, but we've not tremendously placed that into any . Academic funding, similar story. So, the business is usual in the academic funding. It's tremendously focused on going up to those areas where we see what areas of research. It's like, talk a lot about these applications with SOLiD and cancer or gene expression, talk about what we are doing in MicroRNA, because what see is continued funding in the academic area focused on the needs and continues to be progress every time you open the newspaper and read some of the scientific panels and focus on disease some of these... what areas of academic funding is where we are focused on. And on applied markets we continue to expect to be strong. We don't think there is going to be any change from the concern of the world about the quality of that food, the quality of the environment, it's not going away anytime soon and most of the world is waking up for the fact that DNA fingerprinting testing is just a great way to identify criminals more in a proactive way. So, that's all led into our forecast together with the assumption that more biologic drives some more activity, and biotech will continue to focus on biologics and bio-manufacturing.
Quintin Lai - Robert W. Baird
Thank you for that. Very helpful. As for as... earlier today Invitrogen talked about integration teams and... how are you managing the two R&D groups? Because again Invitrogen talked about moving ahead toward what they call third-generation consumable-based next-generation sequencing. And how does that... how can you or can you dovetail any of that work with what you are doing now with some of your internal projects?
Tony L. White - Chairman, President and Chief Executive Officer
So, our internal projects are just continuing as normal. So, there is no work we've been doing together on that. Clearly in the integration planning, we look towards the future and really the work... it's setting out what are the priorities. Clearly, if you look towards what we have with SOLiD, actually we believe that SOLiD has always taken it into the sort of second-generation, third-generation sort of throughput we adopted. If you look to the extra capability that we've driven already, we're certainly aware and we currently buy components from Invitrogen that relate to the some of the [inaudible] use in the system. So, there are opportunities as we look towards that, where we say we could look for opportunities and synergy and that maybe specifically new R&D programs that we are considering in the new company.
Quintin Lai - Robert W. Baird
Thank you.
Operator
Your next question comes from the line of Jonathan Groberg with Merrill Lynch. Please proceed.
Jonathan Groberg - Merrill Lynch
Good morning. Thanks a million for taking the call. And congratulations on the ongoing proposed merger with Invitrogen and the results. Can you maybe just add a little bit more detail to a few things here? For example, you said you've had about 100... 100 orders to date in the SOLiD. And can you, Mark, maybe just describe where you are at in terms of revenue recognition from the date of... kind of order shipment to when you're recognizing revenues on these now?
Mark P. Stevenson - President and Chief Operating Officer
Yes, we... I can, Jonathan. So, I'll give you a bit more color on that. I mean certainly the traction we've seen is after introducing 2.0 at the beginning of May, that's where we've certainly seen the pick up coming in our order pipeline and flow. And that's built up a backlog for us, which is good. As I've mentioned, originally we took about 90 days quarter. What we've been doing is, getting more standard and streamlined acceptance protocol. It is bringing down both the validation time for acceptance revenue recognition. We're currently around 60 days and improving, just as we get maturity of the platform and expect to be well under 30 days following shipment as we go forward.
Jonathan Groberg - Merrill Lynch
So, is it... I mean, is it fair to say from that as a lot of these orders came in May after back of that you... in your backlog that you are... you haven't necessary recognized a lot of the revenues yet from the orders to date?
Mark P. Stevenson - President and Chief Operating Officer
A fair conclusion to draw.
Jonathan Groberg - Merrill Lynch
Okay. And then as you're... as the size of the markets as you.... I know initially you put up some numbers, but you've been doing this work and talking with customers and seem to grow. Is the size of the next-gen market... the potential size of it changed at all in terms of how big you either think it is or will be over the last, say, three to six months?
Mark P. Stevenson - President and Chief Operating Officer
Yes, I think the number we've earned out are still directionally the right number and the growth that we see. Maybe a little bit more upside that we're seeing on that and it's really a question of the sort of ramp rate that we see and how we go forward on it. But I think directionally those market sizes we believe are still the right market sizes. I think we are doing some more work, sort of update that and probably during August, you will hear us bring out sort of a pressured view of what we think the market is, as we do some more work just to validate again [inaudible] what the size of the market is after that.
Tony L. White - Chairman, President and Chief Executive Officer
I mean, this is Tony. I think one of the things that we have to update is our view of the market. As we move from throughput levels, one initially to three to six, I think is what we're specifying now, but we see 15, 20 and more on the horizon. We believe that's going to impact the size of the market, because new applications are going to emerge as a result of that. And so I think that update will have... that data will have to be [inaudible] into an update. It may result meaningful changes to our view of the size of the market.
Jonathan Groberg - Merrill Lynch
Okay, fair enough. Thanks a lot. And then on the flip side of that, you said high throughput instruments and see single digits again. Where do you think you are in terms of the decline? When that kind of flattens out to some degree, if it does? Or if you think that's going to zero. But I know that some of the view has been to that kind of declines or maybe at some point flattens.
Mark P. Stevenson - President and Chief Operating Officer
Well, we still see a residual demand in 3730, which is a high throughput instrument. And actually we've participated in that market also as offering some of the customers refurbished and reconditioned instruments [inaudible]. There are still applications that we think are going to be there. The guidance given to you for 2009 is really discerning. Some people think that our key business is it was going to decline on a [inaudible] two, three years. It's going to decline very quickly over time, here we are entering another fiscal year when that's not been the case if you look at the overall business. We are predicting the decline next year, and that's a single-digit decline that we predicted. At some point, what happens is more of the median throughput instruments over set that high throughput instruments in the consumable growth market. Those are the dynamics going on in that market at the moment.
Jonathan Groberg - Merrill Lynch
Okay. And then just kind of a few clarification questions and then I'll get off. But on the Real-Time PCR, can you just describe again exactly what you were saying you are expecting in licensing revenue next year? I think you said overall, the same amount but fewer new licenses, is that right? Is that what you were saying?
Mark P. Stevenson - President and Chief Operating Officer
What we've said was we expected royalty in levels to be similar to prior year. But a lower licensing fee; in other words, people taking new licenses will decline and so that's the difference. So it's the difference between licensing fees and the royalties that come after that.
Jonathan Groberg - Merrill Lynch
Okay. So you said, lower licensing but similar royalties. And then on Mass Spec, any... there has been a lot of discussion both from you and Invitrogen that there are things in the pipe that are going to come out this year. Is that still on track? Anymore specificity around maybe when those will come out?
Mark P. Stevenson - President and Chief Operating Officer
Well, yeah, we'll continue to be very consistent. We won't announce it until we announce it. But I think we've given a lot of color that, I suppose at the end of the calendar year, during this fiscal year, we'll introduce more products and no change to that update.
Jonathan Groberg - Merrill Lynch
Okay. And then employee turnover in the quarter, can you just talk about that? Was there any increase post kind of the merger announcements?
Mark P. Stevenson - President and Chief Operating Officer
Nothing out of the ordinary.
Jonathan Groberg - Merrill Lynch
Okay. Great. Thanks. I appreciate a lot more detail. Very good. Thanks.
Operator
Your next question comes from the line of Derik De Bruin with UBS. Please proceed.
Derik De Bruin - UBS
Good morning.
Tony L. White - Chairman, President and Chief Executive Officer
Hi, Derik.
Derik De Bruin - UBS
Missed you on the Celera call last night, Tony.
Tony L. White - Chairman, President and Chief Executive Officer
Derik, we didn't.
Derik De Bruin - UBS
I'm not saying a thing there.
Tony L. White - Chairman, President and Chief Executive Officer
I know you're not. I know you're not.
Derik De Bruin - UBS
So a question. Just I guess, when you look at the interest... and a lot of the stuff I wanted to ask has already been asked. I'm trying to fish around the size here. So when you look at the interest for the SOLiD products, can you possibly tell us what people are looking for in terms of applications? How many of these are more sequence specific, how many of these are... how many of these are more... I guess, people looking for gene expression type applications versus DNA analysis of applications? Give us some breakdown on what the feel for that is?
Mark P. Stevenson - President and Chief Operating Officer
Derik, I was asked the same questions yesterday, I'm not looking forward to the answer.
Tony L. White - Chairman, President and Chief Executive Officer
And as I... I keep saying that only and we've tried to... I mean, it is a fast-moving area and field. We... it is a good question, Derik, because we're very focused on applications and workflow. There are sort of a series of applications that we... that are out there and sort of shown in our presentation. Specifically, you can see from my comments earlier that the two that we're really focused on is looking at just this whole structural variation area and taken a particularly focus around the disease of cancer and just because of the complexity of looking at the inserts into this genome, variation in this genome deletion, other structural variations. This one application, it just required the attributes that we have in the system in terms of accuracy and throughput, lend itself very well to doing those studies as well as the systems to make that. So that's one sort of broad set of applications and those customers continuing to demand further improvement in that and we focus on that work flow, you'll see us announce in the software community new tools for that as we try to expand that and make that application easier for those customers to be more robust in just labs around the world. And the second application area we're focused on is this gene expression area, which is a pretty interesting new area that's... and somewhere, we already are the biggest gene expression company with all the work we do with patent and on validating all the work that's been done on array. But now there's a whole new area of work going on where people are going back and looking at really what to express in the genome. And that's often going on in labs where we need to focus more on the workflow, so you'll see us working with the more completions of side in often Ambion to make sure we got an application kit for doing some of these small RNA, making that application more robust and easy to use, and working with the game of software tools necessary to do the kind of work that the group from Australia published on [inaudible] on this being called now transcript-owned profiling. So those are the two applications. Tony used it as a follow-up question to me, okay, Mark, we'll help dig out of those and what's the size of that market and it's very dynamic, we're judging it from sort of where the directionally the applications are, but that's where we've got our focus on, the R&D applications and those are the two that we are focused around.
Derik De Bruin - UBS
Great. Dennis, I wanted to ask a question just on the gross margin line, I mean your guidance calls for a slightly higher gross margin in fiscal '09. But in 2Q... fiscal 2Q of last year, 58.1% of some royalties in that. To get to the higher number there, are you kind of implying a much... [inaudible] that kind of implies a much significant ramp up in the gross margin. We agree that you didn't see that in the last two quarters. What's kind of built into that, the expectation of the gross margin trending higher?
Dennis L. Winger - Senior Vice President and Chief Financial Officer
A couple of things, mostly operational efficiencies and improved margins on our Enzymes program are probably the two largest factors.
Derik De Bruin – UBS
Okay. And kind of I will get back in the queue, thanks.
Operator
Your next question comes from the line of Dan Leonard with First Analysis. Please proceed.
Dan Leonard - First Analysis
Good morning. I could use a little more detail on the forecast for the first quarter. If you are looking at... I mean from current exchange rates, I would expect foreign currency to be a bigger benefit in the first quarter of fiscal '09 than it was in fiscal '08 which would imply that you're looking for organic growth to be lower in fiscal '09 versus fiscal '08 and that comes despite the positive feedback and order flow you're getting on the new product launch of SOLiD 2.0. So could you help me understand what are some of the other dynamics in play there?
Tony L. White - Chairman, President and Chief Executive Officer
Well, the fact is on the positive side are the right ones and we were trying to give a call out to what we think Q1 looks like to guide you in the right direction. Some of the numbers we've got from Street look like they didn't take into account the... traditionally, this is our weaker quarter for as you see to see on the sort of breakdown in the four quarters, because of the instrument seasonality we have, for example, in Europe and so that's factored in. As well when you look to the full year, it comes a little bit through the introduction of new products later in the calendar here in the mass spectrometry side. As I commented with capital instruments cycle, typically when you are introducing your product during the fiscal year, that drives new growth. So those are the considerations we've got as we made our fiscal plan and sort of estimate for the first quarter.
Dan Leonard - First Analysis
Okay. And then Mark, even on the capital equipment side, if you have 100 orders in hand at, let's say, $500,000 an order, that's $50 million today and I would presume that you would take more orders throughout the course of fiscal 2009. So with only a single-digit decline in the CE business, it seems like the DNA sequencing business could have quite strong growth, which should growth which should drive the overall top line. Am I thinking about that correctly or am I missing a piece?
Tony L. White - Chairman, President and Chief Executive Officer
Well, those are the pieces in the model you want to think about. I mean where... we are not going to break out anymore detail, but those are the drivers and mitigators of that revenue category. You have to bear in mind, we have a big fee business at the moment and so that's a fairly large number when you get that decline going down. And your estimate on the solid update and it will go on, and the update goes on throughout the year. So that's the way that you should think about the model for that category. And that's the plan we will have to execute here.
Dan Leonard - First Analysis
What's the typical lag between receiving an order and shipping the product for SOLiD?
Tony L. White - Chairman, President and Chief Executive Officer
Typically, I mean as in most capital instrument cycles, we're normally in a sort of six to eight-week timeframe, that's typically where we do and try to get to most of our instrument cycles. Oftentimes, we try to ship, if possible, to most of the customer labs not ready for it, sort of can go up and down such as yet, and to get ordered towards the end of the quarter, because you sometimes build out backlog [inaudible] nature of the business.
Dan Leonard - First Analysis
Yeah. And my final question for Dennis. Dennis, also in the forecast, you're expecting SG&A as a percentage of revenue to increase in fiscal '09. Why is that?
Dennis L. Winger - Senior Vice President and Chief Financial Officer
Largely increased investment in the agent-specific area and other emerging markets, and some of it's currency. Not half of it is currency.
Dan Leonard - First Analysis
Okay. Thank you.
Operator
Your next question comes from the line of John Sullivan with Leerink Swann. Please proceed.
John Sullivan - Leerink Swann
Hey guys, good morning. Congratulations. A couple of quick ones. First one, in the Real-Time PCR Applied Genomics category, can you talk about the drivers away from TaqMan? And just for a second, for example, I'm wondering if RNA gets the old Ambion lines, is that a significant grower, is it a grower near the... anywhere near the 15% experience of the entire category?
Tony L. White - Chairman, President and Chief Executive Officer
Yes, the Ambion business continues to be a strong double-digit grower for us, including those debt.
John Sullivan - Leerink Swann
Okay. And then secondly, also in that category, are you seeing any meaningful business away from life science labs? Specifically, are you seeing any meaningful business in hospital labs or clinical labs for the products of Real-Time PCR Applied Genomics?
Tony L. White - Chairman, President and Chief Executive Officer
Yes, we are. I mean we continue to see this trend where now you see movement of discovery, the validation on TaqMan and then being used in extensive clinical research in clinics and institutes. So, that's something we have done. We've continued and actually have accelerated some of our programs to ensure that, we upgrade our quality systems to support our customers in those clinics and the components. We've also been working in, for example, some of our factories like our Singapore operations was recently given ISO 1345 certification, which allows us to register products and go forward with, for example, in Europe, register in the key IVD market. So, we see that move into those kind of clinical labs. We also see the pharma move it into the clinic with some of the TaqMan assays, which are used in drug metabolizing enzymes and sort of is that trend. And then the two other markets, which are increasingly validated for us, one is this pharma biologics, which is definitely a validated controlled market and we see update of TaqMan products into that. And finally, our business with Ambion, it started which was in the animal health area, which is also validated and regulated market, and so we are working with the regulators there to register us. I can ask them to launch more products for the animal health market.
John Sullivan - Leerink Swann
Thanks very much for all of that.
Operator
Your next question comes from the line of Peter Lawson with Thomas Weisel Partners. Please proceed.
Peter Lawson - Thomas Weisel Partners
What's been driving the tax rate lower or rather for 2009 what has given you that lower tax rate and is that transferable do you think for Invitrogen?
Tony L. White - Chairman, President and Chief Executive Officer
I don't know Invitrogen's tax position, I am not going to comment on Invitrogen's tax rate. So, what's driving it for us is greater use of our Singapore facility and a restructuring of our relationship with Singapore is the primary factor driving the lower taxes.
Peter Lawson - Thomas Weisel Partners
Okay. And then on the R&D side, there was a lower R&D expense that was coming from lower employee-related costs. What was that and is that going to continue going forward?
Tony L. White - Chairman, President and Chief Executive Officer
Yes, the main impact as we've broken out most of this year is actually being a reorganization in R&D related to the termination we did at the U.S. Air Force contract, so we've stopped that project. As we look towards sort of the right level of R&D, we've continued to stay, the sort of current level that we have is approximately the right level for R&D spending.
Dennis L. Winger - Senior Vice President and Chief Financial Officer
It will be slightly lower, which is 8.8% slightly.
Tony L. White - Chairman, President and Chief Executive Officer
And we do a very active sort of portfolio of those R&D projects to make sure that investments are aligned with some of the areas you're going to talk about, so that we've increased that, I would say, output of the new products during this last 12 months and what we've launched in the marketplace from SOLiD to consumables through other products in the applied markets, even as we brought down our R&D spending, so we've actually got better productivity out of the group by really taking about a portfolio of products aligning investments with our strategy.
Dennis L. Winger - Senior Vice President and Chief Financial Officer
Most of that just carry over from these actual numbers.
Peter Lawson - Thomas Weisel Partners
Okay. And then, is there anything emerging out of the DNA synthesis business, that's just been accelerating over the last four quarters?
Tony L. White - Chairman, President and Chief Executive Officer
Yes, I think that DNA synthesis category actually improved PCR thermal cycle, a very mature business and really a lot of these specialties about the year and talking about expiration of PCR patents. And actually we introduced a new thermal cycle this last year in the Verity, which has done very well for us. It continues to amaze me personally, the number of thermal cycles we sell each quarter, but it's a very successful quarter and that's called some of the growth DNA through the actual... other technology in that categories continue to decline.
Peter Lawson - Thomas Weisel Partners
Okay. Thank you so much.
Operator
Your next question is a follow-up question from the line of Doug Schenkel with Cowen and Company. Please proceed.
Doug Schenkel - Cowen & Co
Thanks for taking the follow-ups. Real-time PCR, sales were up a bit lower than Street expectations last quarter, they rebounded nicely this quarter. How much of the sequential growth... I am sorry, how much of the year-over-year growth would you attribute to sequential normalization?
Tony L. White - Chairman, President and Chief Executive Officer
I don't know what that means though.
Doug Schenkel - Cowen & Co
I guess it means that last quarter you came in a little bit light of Street expectations. You put up a good quarter this quarter. How much of that is just good year-over-year growth versus maybe timing where maybe some orders didn't come in last quarter and --.
Mark P. Stevenson - President and Chief Operating Officer
You know these differences that you guys count to spend on so much are really pretty small differences. A point or so of growth here is not terribly meaningful. I will say that we've had a couple of woodshed sessions here about momentum in this area and there have been some new marketing and sales programs implemented new vigor around this in the field. Peter Dansky is smiling at me here, but he has just gotten back from the woodshed, I think.
Tony L. White - Chairman, President and Chief Executive Officer
But they are getting, they're just getting, there is new vigor and new attraction in this area. So, I think you could attribute some of it to that and some of it could just.. it's just the way the timing of the quarters work, I don't Mark, you want to add to that?
Mark P. Stevenson - President and Chief Operating Officer
I just don't think it's as dramatic. I think that's the main discussion we've had and let's accelerate it. Occasionally, [inaudible] excuses and don't even let me do that and say at least it was a different time this year than it was the prior year.
Tony L. White - Chairman, President and Chief Executive Officer
It is every year, Mark.
Mark P. Stevenson - President and Chief Operating Officer
So, we said that... if you take the six months, the Easter of the following year before was it decreased the different times or it increased following Q3. So, some of it's just the timing, why the counter moved around, but I will say that we have had a lot of discussions here at planning and I think the team has really recommitted themselves to reinvigorating their momentum in this business and it's obviously paying off. We've got... we've got a couple of really exciting new products in this area that I think got off to a less than stellar start relative to their capabilities, the StepOne product line is an extremely attractive product line and I think it's not unfair to say we didn't really give it our best effort initially and now I think it started to get traction. And the way we are pumping new products into the application-specific consumable side of this business is pretty impressive. So, I'm pretty encouraged by that whole business.
Tony L. White - Chairman, President and Chief Executive Officer
But the good news, Mark, is that Christmas is predictable.
Doug Schenkel - Cowen & Co
That is helpful. Can you on the pace of SOLiD order placements or I guess I should say just orders. Can you give us any color on how many orders or what percentage of orders came in plus the 2.0?
Mark P. Stevenson - President and Chief Operating Officer
There was a clear acceleration in ramp. I don't have in front of me all the details, sort of when it was and it excludes some of the 100 orders we had already and some that we have recognized, the mix of things.
Tony L. White - Chairman, President and Chief Executive Officer
We are actually holding back, not taken orders and so we've got to those, a lot of people --
Mark P. Stevenson - President and Chief Operating Officer
We were all right. I deliberately used the term unconstrained shipments now, because we constrained shipments in the January time. We shipped with installed base system because we hadn't used the upgrade we wanted to do in 2.0 and so we didn't saw shipping those systems through additional customers until we got those systems out there. Because we knew we are going to upgrade all the systems. We've done a tremendous effort of also going round upgrading in the field to 2.0. Customers have really appreciated that as well because we said even if we launch 2.0 the upgradability of the system is there, as we continue to develop the system, there will be continued ramp. So, it was certainly was an inflection point for us. The last two months of the fiscal year and particularly the last couple of weeks were great fun as we closed a lot of orders here and we continued to see strong traction in the marketplace.
Doug Schenkel - Cowen & Co
Okay. So, last one. Recognizing you guys have definitively made a lot of progress with the upgrade. You just pointed to the fact that you were holding back orders until you got the upgrade out there and that makes a lot of sense to me. But I guess one hole that people could poke at, one hole in your 40% of the market capture number could be that there was some pent up demand, you're holding back on orders. How would you answer that?
Tony L. White - Chairman, President and Chief Executive Officer
Maybe gone to somebody else while we were holding back. I think the 40% number is real. I think it's... if we don't give you all of the exact numbers and we're not going to, we could have this debate all day, but we're confident that we've given you the right guidance about that.
Doug Schenkel - Cowen and Company
Okay.
Tony L. White - Chairman, President and Chief Executive Officer
And that's the matter we said going forward, as well as we look to the year, and that's what you are going to expect our internal and communication experience will be as well.
Mark P. Stevenson - President and Chief Operating Officer
I mean you would agree get that while you're not telling a customer you don't want to accept the order yet, that temptation is going to go elsewhere and they didn't.
Doug Schenkel - Cowen and Company
No that's right. It's... you guys certainly are making progress. I just wanted to get a little bit more clarity on that.
Operator
It appears we have no more audio questions in queue at this time. I would like to turn the call over to Mr. Peter Dworkin for closing remarks.
Peter Dworkin - Vice President of Investor Relations and Corporate Communications
Thank you. Well, we've come to the end of our call. Thanks for joining us today. I'd just point out that since obviously there is keen interest in SOLiD that we'll be participating in the first week of August at the Leerink Swann Conference on the panel there about next-generation sequencing technology. Also a reminder that we post the management remarks that you heard this morning, the prepared remarks on our website that should be posted shortly. And that a replay of this conference call will also be available for a couple of weeks always on our website. Information about finding that is provided in our press release this morning. Thanks and have a great morning and day.
Operator
Thank you for you participation in today's conference. This concludes our presentation. You may now disconnect and have a good day.
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