安捷倫 (A) 2002 Q3 法說會逐字稿

Good day, everyone, and welcome to the Agilent third quarter earnings conference call. Today's conference is being recorded. At this time, for opening remarks and introductions, I'd like to turn the conference over to the Investor Relations Director, Mr. Hilliard Terry. Please go ahead, sir.

Thanks, and welcome to Agilent's third quarter conference call. With me are Agilent's CEO Ned Barnholt and CFO Adrian Dillon. After my introductory comments, Ned will provide his perspective on our performance this quarter, and on the business environment. Then Adrian will provide detailed commentary on the financials.

After that as usual, we'll open the call up for your questions. In case you haven't had a chance to review the release, you can find it on our website at www.investor.agilent.com. I'd like to remind that you in our prepared remarks and our answers to your questions, we will make forward-looking statements that involve risks and uncertainties. These risks and uncertainties can cause Agilent's results to differ materially from management's current expectation.

We encourage to you look at the company's most recent filings with the Securities and Exchange Commission to get a more complete picture of all the factors at work. I should mention that the guidance we'll provide today is only valid at the time we give it. The company assumes no obligation to update the guidance provided on this call as we move through the quarter.

Lastly, as a reminder and clarification, Agilent's CEO and CFO will make their filings under SEC order 4460 no later than September 16, 2002. This is the due date for Agilent because of our non-calendar fiscal year. Companies that have a calendar fiscal year were required to file by August 14th. With that, I'll turn it over to Ned.

Thanks, Hilliard, and good afternoon, everyone. Today I'll cover four topics. I'll describe our third quarter and then explain the factors that shaped our results. I'll talk about actions we're taking and then close with some thoughts on the outlook and our guidance for the fourth quarter.

Clearly, we're very disappointed with our results that were well below our plan and our guidance. In spite of our disappointment, we did have some bright spots in the quarter. For example, three of our businesses achieved year-over-year order growth and sequential revenue growth. Life Sciences and Chemical Analysis, semiconductor test, and semiconductor products.

In addition, we continue to stay on track with our plans announced last year to achieve $1.2 billion in annualized cost savings by the end of Q4 from our restructuring programs. The go live of the initial phase of our ERP system was the main factor in our lower-than-expected revenue of $1.4 billion and our loss of 31 cents per share.

This complex implementation covers more than 5 percent of our volume and virtually all of our financial processes. Although we anticipated startup issues, the disruptions were more extensive than we expected. And Adrian will give you more detail. Despite the difficulties, we made good progress overall on our ERP implementation. We have been able to achieve the levels of volume we currently need for orders and revenue.

I'm pleased to tell that you the startup issues are mostly behind us. We really appreciate the support of our customers and suppliers through this implementation. In addition to the ERP challenges, we continue to face a difficult market environment.

Our businesses that address the wireline telecom markets clearly were weaker than expected, although we maintained an aggressive schedule of new product introductions companywide, customers were very constrained in their capital spending. We also had to offer higher discounts to win business. Given this market environment, we concluded that we need to make further reductions in our costs. We believe our current break-even is about $1.65 billion, which is above the goal we set one year ago of $1.6 billion.

Therefore, we have decided to take actions over the next few quarters to reduce our cost structure by an additional $50 million per quarter. We're primarily focused on businesses that are encountering weakness like wireline telecom, and we will accelerate savings from our ongoing investments in IP systems; that leads me to our guidance. We expect revenue in Q4 to be between 1.6 and $1.7 billion, including some of the revenue that will move from Q3 to Q4.

With our new actions, in addition to ones we're already taking, we expect operating EBG in the range of a loss of 10 cents to break even. This guidance includes the 5-cent impact of continuing work on our ERP and CRM systems implementation. In closing I want to assure you that we will continue to balance short-term results with our long-term emphasis on R&D, and investments like the ERP and CRM systems to improve our cost structures going forward.

And in this environment of increased scrutiny on corporate governance, we remain grounded in our 63-year history of openness, transparency, conservative accounting, and uncompromising integrity. Our philosophy and values remain unchanged.

Finally, I want to say a word about how proud I am of our people. They have enabled us to make great progress. I'm just frustrated that the terrific efforts of so many people to bring up the new ERP system and to shape and streamline the company for the future are not yet reflected in our results. However, I'm confident they will be. Thanks again for joining us today. Now I'll turn the meeting over to Adrian.

Thank you, Ned. Good afternoon, everyone. I'm going to try to fill you in on our financial highlights for the quarter, and let me start by talking about the impact of what internally we have called Project Everest, which is the major ERP implementation that we have been referring to and will continue to refer to throughout this conference call.

The results for the quarter were dominated by the impact of the ERP implementation on our operating results. There are some points I want to make about that before going into the details of the operating results. First, as Ned said, the ERP implementation affected over 50 percent of operations, but virtually all of our financial processes.

These major systems implementations tend to have two types of disruptive impacts upon initial implementation. One is impacting operations directly, the second is distorting the accounting for those results. Too often, companies lose track of operations and operating results as they make the switch from Legacy to new financial processes.

We have been working very intensively over the past 60 days to ensure that we don't get that latter ugly surprise that usually shows up early in an unexplained significant account reconciliation variance but then inevitably pops out as a major operating variance when the books are closed at year end. At this point, we are pretty comfortable that we do not have any significant disconnects between our prior Legacy and our new financial systems and we currently have no material unreconciled variances that could give rise to the ugly surprises down the road. So while we're not pleased with our operating results, we are pleased with the quality of the reporting of those results, which is a great relief, frankly, for someone like me who has been through this before and know what can happen.

Second point: As Ned indicated, the difficulties we have had with the ERP implementation cost the company about a week's worth of normal production, above and beyond what we had anticipated for the third quarter, or about $105 in revenue and about $70 million in operating profits. Overall, we had two significant issues in the initial weeks of implementation. First, prioritization conflicts as the total system ramped.

Now, these inevitable conflicts occur only as the total system begins to ramp and they weren't evident at the beginning of a very controlled ramp because we were operating and bringing up the system very slowly, very carefully, and well below 50 percent rate. As we began to hit sort of a 50 percent ramp of normal capacity, we began to get conflicts in priorities of systems instructions. When we had those conflicts that inevitably shut the system down.

And therefore, the problem became compounded by poor system up time and very slow processing speeds. Early on we feared we might have a fundamental software bug, but by working around the clock for about a week, we were able to identify and correct the problem that kept shutting the system down every time it was stressed beyond that 50 percent utilization. That problem, we think, has largely been solved.

The other problem we had was converting backlog from Legacy to new systems. Especially for our highly configured products as in our test and measurement operation, it's really critical how you translate backlog from an old system to a new system and, frankly, we made some mistakes in that translation and that caused an enormous amount of manual clean-up. Again, that was slowed by slow processing speeds and poor up time, but again, the good news is we have now cleaned all that up.

These implementation issues, as difficult and frustrating and as unpredictable as they have been, are to some extent normal and even inevitable given the size and the complexity of the system and the Big Bang nature of this implementation. And I guess there is a legitimate question as to why if these are the normal types of issues surrounding a major system implementation we didn't fully anticipate them. In truth, it's almost impossible to fully anticipate how things will go wrong even with the extraordinary amount of training and testing that we did in preparation for this Big Bang.

At the end of the day, we hope that our preparation would allow us to avoid the magnitude of disruptions that normally occurs with the major system implementation and while we clearly avoided the kind of horror stories that I'm sure many of you have heard about in other companies, both here in the valley and across the country, on balance our implementation experience was about normal, but not significantly better than the average experience. The good news, as Ned suggested, is that we now have overcome most of those transition issues and while the ERP is not finely tuned yet or optimized fully, we believe we are operating at the rate required to meet our customers' requirements and our fourth quarter guidance.

Okay, with that, let's talk about third quarter results specifically. We had guidance for revenues of $1.5 to $1.6 billion. And earnings before goodwill of a loss of 10 to 20 cents per share, and in a guidance included about 5 cents expected from higher caps Everest-related spending. We reported $1.39 billion in revenues and a 31-cent pro forma loss. The unexpected Everest impact was about $105 million in revenue, or about 9 cents per share above what we had anticipated.

Adjusting for that impact of Everest, we had revenues of about 1.50 billion, right at the bottom of our guidance, and we had an operating loss of about 22 cents, which was 2 cents below the range of our guidance. Okay, looking further on the income statement, for net orders, we had net orders of $1.456 billion. That was down about 9 percent sequentially -- that is, from the second quarter, though it was still, even with the disruptions, about 10 percent above a year ago. The estimated impact of Everest was about $88 million reduction in orders, and that net was composed about a $38 million loss in orders in the third quarter and about a $50 million pull-forward into the second quarter of orders that we realized specifically in semiconductor products. If you make those adjustments to our orders, what you would find is that adjusted for Everest, we would have orders of about $1.544 billion, essentially equal to the $1.547 billion of orders we would have reported in the second quarter were it not for that $50 million pull-forward. And orders would have been fully 17 percent above one year ago. What does that mean? Well, first let's be clear that all of these numbers that we're giving on the impact of Everest are order of magnitude. They're our best judgment, but they're not accounting accuracy. Having said that, with these adjustments, I think you can see that orders were about flat sequentially after two consecutive increases in orders.

This was also the second year-to-year increase in orders since the first part of last year. Cancellations in the quarter were roughly flat for the third consecutive quarter at about $90 million, and they were dramatically better than the one quarter billion dollars worth of cancellations that we saw last year at this time. Looking at revenues, we reported revenues of $1.391 billion. That's down about 4.5 percent sequentially and still off 24 percent from a year ago. As we have already indicated, the impact of Everest on our revenues was about $105 million.

If you add that back, you would find that we would have reported about 1.46 -- excuse me, $1.496 billion in revenues, up about 3 percent from the second quarter, down about 18 percent from a year ago. Based on this estimated impact, we would have reported the second sequential rise in revenues after a similar rise in the second quarter of this year.

Timely, looking at the book to bill, we reported a book to bill of 1.05 this quarter, down slightly from the 1.10 in the second quarter, well above the .73 of a year ago, making the various adjustments to Everest bookings and billings that I mentioned above, we would still have reported a book to Bill above one at about 1.03 versus about 1.06 in the second quarter. That would have made it the third consecutive quarter that Agilent has had orders above the level of billings. Okay.

Going on to gross margin, gross margin is probably where the impact of the operational difficulties of Everest were most pronounced. We reported a gross margin of about 40.4 percent, down two points sequentially and off almost a point from a year ago. The impact of Everest on that gross margin was about $70 million in the quarter. That's the week's worth of normal production. That's worth about 4 percentage points. So adding back that 4 percentage points, or $70 million, we would have reported about a 44.4 percent gross margin. In fact, two points better than we had realized in the second quarter and three points better than a year ago.

Turning to R&D, we reported R&D spending of about $268 million. That's down about 6 percent sequentially, down about 9 percent from a year ago. Support expenses. We reported SG&A expenses of about $555 million. This is the second area where the impact of Everest was most pronounced. The $555 million is about 40 percent of revenues. It was about flat from the second quarter, but we had 35 million worth of increased programmatic spending for our ERP implementation and the beginning of our CRM implementation. If you subtract that $35 million in increased spending from our $555, would you find that we had adjusted support costs of about $520 million, down from $552 million sequentially by about 6 percentage points.

And there I think you can see, as Ned was suggesting, the benefits we have been achieving from our restructuring programs to date. That adjusted number is fully 14 percent below a year ago. One other note by way of guidance.

We have talked about the exceptional level of spending that we experienced this quarter of about $35 million. We expect that level of spending to be repeated in the current quarter, the fourth quarter, and then one more time in the first quarter of next year as we finish the ERP implementation and then the CRM implementations consecutively, then we'll return to normal spending levels beginning in the second quarter of next year.

Turning to the tax rate, the pro forma tax rate was stable at about 43 percent. You will have noticed, however, a change in the GAAP tax rate. In the third quarter, it jumped to 47 percent from the prior 25 percent. That change reflects the cumulative benefit of the R&D tax credit work that we had mentioned in the last earnings release both for the current year and for prior years.

And in fact, therefore, reflects an increase in the full fiscal year's tax rate for a GAAP basis of 33 percent, up from the prior 25 percent. So the benefits of that work are paying off very substantially for us on the bottom line. Adding all that up, you'll get an earnings before goodwill loss in the third quarter of $143 million, or 31 cents per share, adjusted for the Everest charges that we have talked about that would be reduced to about a 22-cent loss per share. Adding in $95 million of non-cash goodwill and intangibles charges and $78 million of accrued restructuring expenses, and the tax benefit of about $88 million and you get to our GAAP net earnings loss of $228 million, or 49 cents per share. Okay.

Turning to the balance sheet, we think in the third quarter we continued to make good progress in managing our balance sheet under pretty tough circumstances and with the systems implementations, and a good job in minimizing our cash consumption. During the quarter, our receivables were about $873 million. We generated about $38 million in cash from lower receivables compared to the prior quarter. DSOs were about unchanged at about 57 days sales outstanding. Inventory at about $1.3 billion, we generated an additional $20 million worth of cash this quarter.

Our days on hand were about two days higher at 144 days, mostly because of this -- of the disruptions around the ERP implementation. Also note, please, that for the third consecutive quarter there were no material inventory write-offs approximate, another measure of maintaining control over our working capital. Finally, payables also increased by about $31 million in the quarter. Turning to Cap Ex, our capital spending in the third quarter was about $58 million. That compares to $275 million last year, so clearly we have reduced that spending by over $200 million. -- in just one quarter alone.

Depreciation was steady at about $85 million, and we still expect about $350 million of depreciation for the year, returning to capital spending we're also still comfortable with about 300 to $325 million of Cap Ex, obviously down dramatically from the $880 million of 2001. Finally, on our cash balance, our cash balance at the end of this quarter was $2.105 billion. That's down $130 million from the prior quarter.

That compares to a GAAP net loss of $228 million, and obviously that $100 million improvement from the GAAP loss is one measure of the improvement in balance sheet control and operating -- operating metrics. Okay. Turning to segment highlights briefly, in the test and measurement segment, we had orders of $802 million.

That was down 4 percent sequentially, and even though it was impacted by Everest, it was up 1 percent from last year at this time. We think that ERP-related disruptions impacted orders by about $38 million in the quarter, adding that back and you would see that we had about $840 million of orders in the quarter, about flat slightly above the prior quarter, and that's the second consecutive quarter that we can say that orders in test and measurement segment were flat or slightly up. Revenues at $715 million were down 12 percent from the prior quarter, still down fully 37 percent from a year ago.

Adding back about $95 million of ERP-related revenue disruptions and we had about $810 million in revenue, nearly flat after falling sequentially every quarter since the end of the year 2000. So we really think that we are beginning to see bottoming in this market. The pro forma operating loss was a loss of $279 million. Everest impact on operating costs here was about $66 million, or the Everest-adjusted operating loss would have been roughly $213 million at or a slight improvement over the prior quarter's results. Looking at the market segment orders within test and measurement, the real story here continued to be in semiconductor test.

In the third quarter, it represented the third consecutive quarter of order growth, up 7 percent sequentially, over really solid gains that we experienced in the second quarter. Flash memory and parametric test products were the primary contributors to our sequential growth during this quarter. From a customer perspective, we saw business flatten at the SCMs, but we saw continued growth in the IDMs.

Among our customers, the utilization rate we estimate of Agilent testers is still above 90 percent, which is part of the reason for the continued strength that we are seeing in orders. And we continue to be encouraged by the pace of design wins. We had 63 design wins in the third quarter, up from 44 in the second quarter. If you add together communications and general purpose test, we also think we had some more signs of bottoming. Sequentially, orders were nearly flat for the first time in many quarters when you add back that $38 million impact from Everest, uhm, again, very good news that we're seeing flattening in communications and general purpose tests.

Within that grouping, wireless was stronger with order growth from Asia being particularly strong, though that's more from market share shifts than strength overall. The wireless base station business is still pretty flat. Enterprise and metro are flat to up slightly. The big weakness, as Ned talked about, is in wireline which does continue to decline both for products and to some extent for management services, as well.

General purpose was generally flat with weakness in electronics markets, but a gradual improvement now being seen in aerospace and defense. Turning to semiconductor products, we had orders in the quarter of $383 million, down 20 percent from the prior quarter, though still up 38 percent from a year ago. We believe in semiconductor as we have mentioned previously, including in the last earnings conference call, we had pull-forward into the second quarter of about $50 million worth of orders.

If you were to add that back, would you see that we had orders in this quarter of about $423 million, about flat with the $426 million we would have reported last quarter were it not for the ERP-related disruptions. Revenues at $390 million were up 5 percent from the second quarter, despite the problems we have had in the ERP implementation this quarter. Adding $10 million in additional revenues that we think we lost during the quarter and you would see that we had in fact an 11 percent increase sequentially in revenues and semiconductor products. Our book to bill as reported is about a .98 versus 1.28 in the prior quarter. But if you make adjustments to the pull-forward in revenue and the -- excuse me--the pull-forward of orders and the adjustment to revenue, would you find that adjusted for the impact of Everest, we had a book to bill of 1.08 this quarter, versus 1.18 in the prior quarter.

That makes it the third consecutive quarter where our book to bill in semiconductor products was above 1. Pro forma loss was about a $24 million loss, down from the $26 million loss in the second quarter. And when you add back about $5 million of Everest-related disruptions, our loss is about $19 million.

Again, the details on orders beneath the surface of semiconductor, we saw about $115 million in networking-related orders, down 19 percent from the second quarter, but up 19 percent from a year ago. We continued to see share gains in the storage optics markets and our enterprise orders were also up slightly from the prior quarter. In personal systems, we had orders of about $268 million, down about 20 percent from the prior quarter, but up by nearly 50 percent from a year ago. Within personal systems, we do believe that spending on consumer electronics is holding up.

Our FBAR orders were stronger than we expected and we saw additional design wins at several key handset manufacturers, and our ep had its first production order from a major handset manufacturer. The weakness was in priterasics [PHONETIC], which were down as were expected bass last quarter was unusually strong. The good news here is that we won several additional design wins.

Finally, Life Sciences and Chemical Analysis, orders were at $271 million, were off about 5 percent sequentially but seasonal -- the seasonal pattern in this business is to be strongest during the first and the fourth quarters. So we are not surprised by the weakness in the third quarter sequentially. Compared to a year ago, orders were up 7 percent. Revenues at $286 million were up 5 percent sequentially and up six percent from a year ago. And this segment turned in an outstanding performance on the bottom line, generating $42 million of operating profits for nearly a 15 percent return on sales. That's versus $25 million of operating profits in the second quarter, or 26 million a year ago. Orders -- again, below the surface, orders for Life Science products were up 9 percent year-over-year, though they were down about 10 percent sequentially. Again, we think that's the normal pattern. This quarter we announced several new products. Nanoflow Proteomics Solution and our Security Network Data system for Pharma QA and QC processes. We think that both of those product introductions have helped ameliorate what otherwise would have been more weakness in the life sciences. Orders for Chemical Analysis were up 6 percent year to year, again good news. They were down slightly sequentially. And this is the first quarter in a long time where book Life Sciences and Chemical Analysis revenues were both up year to year and sequentially. So outstanding performance out of this segment. Finally, on guidance, we are going to skip a discussion of the macro environment in the markets and try to get to the questions. As far as Agilent guidance as Ned said, we are guiding revenues of about 1.6 to $1.7 billion in the fourth quarter.

That includes roughly $55 billion of revenues that we expect to recover in the fourth quarter that we didn't get in the third quarter. Our earnings before goodwill--we are guiding to a 10-cent loss to a break even. That includes -- that range includes roughly $30 million of operating profits from Everest-related revenues that I mentioned before. It also includes the $35 million or roughly 5 cents per share, of unusuality implementation costs that I also mentioned earlier.

Finally, on restructuring, as Ned indicated, our best judgment of operational break even is around a $1.65 billion per quarter rate. If we abstract from the exceptional systems costs we are now experiencing. That compares to a goal of about 1.6 billion break even. The shortfall as Ned emphasized is not because we're not achieving the previously announced cost savings of $300 million per quarter. In fact, we're very confident we are achieving those savings both in head count and in dollar terms. So there's two things that are going on. One is the mix of business strengths and weaknesses.

Several of our businesses, including semiconductor tests, semiconductor, Life Sciences and Chemical Analysis, wireless tests are now rising. And on the margin, we're having to add incremental variable resources to support the growth of those businesses. By the same token, the wireline and optical markets are continuing to decline and we have not taken structural costs out as quickly as those markets have declined, again as Ned said that's where the focus of our new efforts will be, along with accelerating the cost efficiencies from our IT investments. Last, of course, is pressure on gross margins.

And those pressures on the margin have forced to us give back a portion of those savings to customers in order to keep the business that we have achieved, meaning we haven't retained 100 percent of that $300 million cost reduction. The additional $50 million per quarter of cost reduction that Ned spoke of is designed to enable Agilent to achieve the $1.6 billion break even within the next six to nine months. With that I'll turn things back over to Hilliard for questions.

Thanks, Adrian. Operator, at this time we're ready to take questions.

Today's question-and-answer session will be conducted electronically. If you do wish to ask a question, please press the star key followed by the digit 1 on your touch-tone phone at this time. We will come to you in the order that you signal. Once again, that's star 1 on your touch-tone phone for questions. We'll pause for a moment to assemble the roster. Our first question comes today will come from Edward White with Lehman Brothers.

Thanks. Two questions. The first is can you talk a little bit about how you are making the adjustments to your numbers from the ERP implementation? In other words, there were a lot of differences in the numbers between what it would have been without the ERP implementation and what it was. I'm just wondering if you could talk a little bit about your methodology for making those adjustments?

And then secondly, you mentioned that, uhm, you know, the cuts in infrastructure hadn't been as rapid in the wireline and -- wireline infrastructure and optical as they had -- the cuts weren't as rapid as the decline in revenues. Can you talk a little bit about that about why that is and, you know, if there is any strategic reason why you hadn't cut as rapidly there and what you're planning to do in those areas?

Hi, Ed. It's Adrian. I'll take the first one and Ned will take the second one. As to how did we estimate the impact of the ERP on our orders, revenues and profits, we did both a bottoms up -- in other words, a very detailed analysis by operation of what we felt the impact was on our ability to take orders and our ability to recognize revenue. It wasn't so much that production was down as that the costs of production were very substantial. And we know how much production we lost because the system was down and so that gets you the $105 million.

We also try [INAUDIBLE] that from a top down as well, but the short answer is that we did a very rigorous bottoms up analysis in the two businesses that were most significantly affected and that's in the TMO business and the semiconductor products business. $70 million operating profit decrimental was also again a view of--we have material costs order of magnitude in the 25 to 30 percent of our cost of goods sold. Other costs are fixed to the extent that we can get the direct labor out quickly, and in an environment like this in fact, we're adding extraordinary resources to try to get the production out the door.

So it is a bottoms up analysis of the explicit costs of both satisfying those orders and delivering those orders as well as the foregone profits from the revenues. It also ties to the 70 percent decrimental that we normally see in the short term when Agilent's business turns down.

Okay.

Ed, let me make a comment on the wireline test business.

First of all, you asked about infrastructure cuts. You know, we're certainly doing infrastructure cuts across all of our businesses and a big portion of the $1.2 billion in annualized savings that we are accomplishing already is through the broader infrastructure areas not just in the specific businesses.

But regarding wireline telecom, we have been reducing our research and development and marketing and sales investments there as part of that $1.2 billion program. We had a very aggressive plan to cut back on some of our investments in those areas. Unfortunately, the business has declined even faster than those cuts were anticipating.

And as a result, -- and as a result of the fact that we are, you know, really not sure when this business is going to be recovering and how soon it recovers or how fast it recovers, we have decided that we do need to make some additional reductions in some of those areas. And we're in the process of working through those plans right now.

Okay. Thank you.

[INAUDIBLE] from Goldman Sachs.

Yeah, first question would be from -- for Adrian. Could you comment on the operating cash flow and what the expectation is over the next couple of quarters about becoming cash flow-positive?

And then to shift to some operating perspective from, uhm, Ned, if you could give us a sense of what the contribution from new products were, there were a number of products that were introduced at supercom, just get a sense of if we're looking at revenues this quarter and your projections for next quarter, how much of that is coming from new products and a sense of market share shifts here?

This is Adrian again. The first one on the operating cash flow prospects, we do not currently have baked in any restructuring costs associated with the additional $50 million of costs that we are going to take out, abstracting from that, we would anticipate being roughly cash break even in the fourth quarter and cash flow positive on an operating basis in the first quarter.

How close is that, Adrian, on a -- when you say hitting, is that, uhm, you know, where you hit zero in the beginning of the quarter and you're positive throughout the quarter and how -- how sensitive is that?

I'm not -- I'm not sure I understand.

Just make sure I understood correctly, because you would be operating cash flow positive on a run rate basis in the fourth quarter or that the actual results would be cash flow positive?

For the total quarter, it will be, you know, plus or minus $30 million before any additional restructuring costs, Dean, would be our best guess. And then it would be significantly more positive operationally in the first quarter.

That includes ERP savings?

Yes.

Great. Okay. And then from the market share gains and contributions from new products?

Yeah. Dean, as you know, it's kind of hard for us to, uhm, track accurately the contribution from new products. So I can't give you a specific percentage. I do know, as I have mentioned before, we have had a very, very good new product year.

If you went to Semiconn West, we had a lot of new products there we had a lot of new products at Supercom. We have had a great year in our Chemical Analysis, Life Science business as well as our semiconductor component businesses. So overall, we feel very good about our new product output for this year.

But in terms of the overall impact, unfortunately, in some of those products, we haven't achieved the revenue goals that we wanted to because the market has continued to remain soft. But we do believe that we are gaining share in many areas. For example, in the semiconductor test, certainly a lot of the data supports the fact that we believe we have gained share there in the last year or so. If you look at the Life Sciences and Chemical Analysis, our year-over-year growth versus our competitors' is also, you know, one of the best if not the best in the industry.

If you look at the communications test area, it's really hard to tell because the industry has been so depressed overall. But we still believe that we are gaining share in network management areas, wireless, RF and microwave tests. We have come out with a lot of new products in those areas and have gained share. And I think, uhm, overall, feel very good about the position we have in semiconductor products.

We believe we're gaining share in the storage market. We continue to gain share in the fiber market. And so overall, we feel very good about our market share position.

Dean, one other elaboration on that would-be semiconductor test. I think that we would find that for the second consecutive quarter that we are at or larger than any of our competitors in semiconductor tests. That's probably the single most obvious area that we can point to the gains we have made from our new product introductions.

That's based on SIA data?

Correct.

Terrific. Thank you very much.

Our next question today will come from Robert Maire with Bear Stearns.

Yeah. Clarification. Uhm, earlier in your comments, you were talking about roughly a nickel a share in profits that are rolling over into the current quarter. Maybe you can just clarify that a little bit. And secondly, you are talking about taking your break even down a little bit further.

Maybe you can tell us if there are going to be any charges associated with that and what's your sense now that given you're looking to take the break even down a little further? Do you expect that the ongoing level of business is maybe a notch or two lower than previously expected and, you know, given that it looks like we're a little flatish here, may see some weakness in semi equipment going forward?

Okay. Robert, let me try the first two. The 5-cent charge that we're talking about for the fourth quarter for systems implementation costs is the same 5 cents that we anticipated in the --

No, no.

I'm not talking about the 5 cents. You said a nickel of profit. Excuse me, 9 cents of profit was pushed into the current quarter. That should have been booked in the reported quarter?

Yeah.

Well, 9 cents was the impact of the $100 million reduction of which some of that comes forward into Q4. I think the number that Adrian used was about 5 cents, would come into Q4 as a recovery from the lost revenue in Q3. Not all of it rolls into Q4 but about 5 cents of it rolls into Q4.

So some of it just gets lost?

Well, let me me elaborate on that one.

About 5 cents of it gets rolled into the first quarter. One or two cents gets rolled into the first quarter because of the lead times on product production. There is an amount order of magnitude of $20 million of turns business that's just lost.

Okay. So had we not had the ERP implementation, the expectation for the current quarter would have been a loss of 15 cents to a loss of a nickel, is that about right?

That feels about a nickel high.

Again, we also have a nickle until there for the ongoing Everest and Project Independence expenses.

Moving on to our next question, we would like to ask that you limit yourself to one question due to time constraints. We'll take our next question from --

Before we leave, let -- there was a second part to that question and let me just try to answer that. It has to do with our break even. The fact that we're taking our break even lower really is a result of two things.

One is the fact that we're at about $1.65 billion today, even though we have achieved the restructuring savings that we set out to a year ago. Our break even is still a little higher than we would like it to be, partly because of mix changes and gross margin pressure in pricing. So as a result, we feel we need to keep working to get the break even down to what we said last year that we wanted it to be, which is the $1.6 billion.

So it is a reflection of our commitment to achieve the goals that we set out to a year ago and, frankly, in this current market, we believe that's important because, clearly, the business is stabilizing. It's not improving a lot in the next several quarters and as a result, we think that we need to keep working to bring the cost structure lower.

Our next question will come from Max [INAUDIBLE] with Credit Suisse First Boston.

Two questions. One on the pressure on the gross margin side.

I was wondering if you can comment what you're seeing in the pricing environment now if those pressures had been from pricing declines that have happened up to this point and you're now seeing some stabilization or whether the pricing declines are continuing along their current trajectory? And second, I guess if you look over the past two quarters, the big growth engines have been the ATE business and the semiconductor business. If you were looking to those two to be the main drivers of incremental revenue growth over the next couple of quarters, or if you were looking for those to flatten and gains to come from other areas? Thanks.

I think, uh, regarding the gross margin pressure, we should continue to see that. I think we certainly have seen it over the last two or three quarters as we have mentioned to you in previous conference calls.

I think it's just a reflection of the markets we're in where everybody is -- everybody is getting very aggressive to try to win business. So it's certainly not letting up. I don't think it's getting any worse. But certainly it's fairly consistent with what we have seen over the last two or three quarters. And when we did our restructuring planning last fall, a year ago, we had not anticipated quite as much of the gross margin pressure as we have seen and as a result, that's why the actions that we're taking to reduce our cost structure even further.

Regarding ATE and the SPG growth, I think those are to continue to be pretty strong even though you get mixed messages in the marketplace for the outlook for the semiconductor business and semiconductor capital equipment businesses. We feel that on a relative basis, those are two of our stronger businesses. They are driven by a slightly different set of dynamics. I think the consumer markets have held up better than the telecom markets and some of the enterprise markets. And as a result, you know, we expect to see some ongoing strength there.

In addition, those are two businesses where we believe we have an opportunity to continue to gain share. We have very strong competitive positions. And a lot of new products in our portfolio that hopefully will allow us to grow share even in a relatively weak market.

Our next question today will come from Richard Chu with S.G. Cowen.

Yes.

Thank you. I need to get a couple of things clarified. I have a question -- going back to the gross margin question, Adrian, I feel your comment that if you adjusted for Everest, the number would have been 44 percent and change. How do you reconcile that with the discussion about pricing pressures and incremental pressures since that would have been achieved at, you know, not particularly impressive 1.5 billion level?

Richard, I'll consider that a backhanded compliment.

Aha.

Because the fact -- well, the fact -- our best judgment is that had it not been for the Everest-related [INAUDIBLE], we would have improved margins by 2 percentage points sequentially.

And that's a manifestation of how hard we have been working to reduce the break even around here and every aspect of it including manufacturing costs facility rationalization, moving production to low-cost countries. We have been working very, very hard and with a lot of momentum.

And so frankly, that's the kind of number that we would be anticipating to achieve, if anything, the increased pricing pressure has reduced from what otherwise would have been more than a 2-point improving.

Okay. I'll follow up on that later.

Second, is your 1.6 to 1.7 billion revenue guidance for Q4, is that predicated on a significant backlog reduction, and, uhm, to what extent is it simply a function of the transient Everest catch-up? What are assuming in terms of the ongoing order rates?

We are assuming a modest improvement in orders adjusted for these Everest-related preservations, as well as about a $30 million reduction in backlogs. That's the business that we're going to be achieving in the fourth quarter that we were unable to get out the door in the third quarter so it a bit of both. We are not talking about a decline or even a pause but gradual growth plus a little bit of a one-time rebound from the third quarter.

Richard, you should also remember that for a lot of our businesses, Q4 is our strongest quarter, order-wise. LSCA, traditionally has a very strong fourth quarter. Our test and measurement businesses are usually strongest in the fourth quarter. So seasonally, the fourth quarter is our strong order quarter.

So you couple that with the, you know, the spillover of backlog reduction from Q3, and that gives us, you know, some reasonably good confidence in these kind of revenue levels.

We will take our next question from Barry Liebowitz with Morgan Stanley.

Yeah.

Couple of questions. Can you talk about timing and how long ago did you realize that you had this ERP issue and why not come to market with that a little bit, uhm, earlier than let's say today? And what I'm trying to get at is, again, your visibility and your timing into closing books and which has been a question in the past. And then secondly, just a minor detail.

Can you talk a little bit about the security of the business and what you're seeing on the HP side giving that they are going through a very aggressive ramp in terms of product refresh? Thanks.

Barry. Let me take the first one at least. On what were we seeing and when did we see it, we have been -- remember, our Big Bang date was June 12.

And we basically shut down the Legacy systems at June 12 and we began a very slow, very controlled ramp, following that week. We kept a [INAUDIBLE] for that 50 percent of our business that was affected by it at or below 150 percent of operating levels. We were [INAUDIBLE] each of the systems each of the processes in a very careful manner to make sure that we didn't get -- and we could identify any kind of disruptions that occurred.

The types of problems that we had were full-system problems, the kind of things that you cannot easily test by looking at each module or each business individually, and the only -- they only become manifest when you get a utilization rate that's above 50 percent because then you get these prioritization conflicts on what the system is supposed to do first, which in essence gets you in this big loop and shuts down the system. We didn't begin to run into that until July.

And we didn't know how extensive it was going to be because when you are in the process of one of these things, you don't know what you don't know. You don't know whether it's a fundamental flaw, whether it's something that's going to be fixed soon or something that's really going to be taking a long time.

And so you don't -- the last thing you want to do is to come to market and say, we don't -- we have a problem, we think, we don't know how long it's going to last and we don't know whether we can fix it or not. Our judgment was that we would work very hard and try to identify whether this was a quote, unquote, normal type of ramping issue or whether it was something more fundamental and then how quickly can we overcome it. We didn't realize what it was -- what the impact was going to be fully until virtually the quarter was over.

And -- Sorry, go ahead.

I was just going to say I think that's really important. We wanted to be able to go forward with a -- a confidence statement about where the system is and how stable it was and frankly, it's really only been in the last few weeks where we have achieved the level of stability that we want and we want -- and we also wanted to make sure that we were at the volumes that we needed to achieve our Q4 order and revenue levels.

And I think to be able to go out and make any other statement prior to that would have been --you know, we couldn't give any definitive answers. There would have been more questions than we can answer.

And again, while it's disappointing to us that it costs us about a week's worth of production more than we expected, we are really very pleased that at this point we can say that we have a system that is up and operating at a level that will allow us to achieve the guidance that we are suggesting and to satisfy our customers at these levels.

Our next question today will come from Steven Couper from with Wachovia Securities.

There was also a question before I -- before we move on, there was a question about the rate of business on the HP side. Let me just close, Barry. On that.

You know, I can't really comment about the specific incoming rate. We are working very closely with HP and tracking their business. I know they are in a very aggressive ramp and product rollover mode. We've won the majority and continue to win the majority of business with HP. And you know, we're certainly wishing them lots of success because again we're very closely tied to the ramp of their printers.

But we're in very good shape in terms of design wins. We're poised and standing by ready to ramp to meet their demand. And hopefully, we'll see that demand over the back-to-school and the Christmas holiday season.

Next question.

We will take our next question from Steven Couper from Wachovia Securities.

Okay. Two real quick ones. So in semiconductor tests, did you see pricing pressure in system on a chip and 300mm testing devices and, you know, how new is that?

I gather you didn't -- hadn't seen that in the April quarter, if you saw it now. And second, is, uhm, so I heard just at the end of the prepared comments, a 6 to 9-month time frame to get to break-even. Is that correct? And does that mean that that's basically when you expect to be at about 1.7 billion in revenues?

Let me take the latter one. What we said was it would take us 6 to 9 months to get down to a $1.6 billion per quarter cost level.

Whether that's a level of profit -- what level of profitability that represents depends on what happens to orders and revenues at that time. But, no, we are not trying to signal that we are not going to be profitable until that time.

I think that's important--what we're talking about is the cost structure of the company and aiming to get the cost structure to 1.6 billion. We certainly are working also on the top line part of that equation to get the revenue up over 1.6 billion and hopefully we'll be able to achieve, you know, the profitability sooner, you know, quite a bit sooner than that. But going back to your comment about pricing pressures and SOC, you know, I think we've seen pricing pressures in all of our businesses, including SOC. Some of it is, you know, related to, you know, product cycles.

Some of our competitors introducing new products, people, you know, really going aggressively after some of the business that's out there. And I think we've seen quite a bit of that in the last couple quarters, even in the SOC business. It has, fortunately, we have a very strong product position. We have a very good story and a very competitive product from a cost point of view. So we have been able to continue to win.

If you, uhm, remember we said that we have won over 60 design wins this quarter, even with all the pricing pressure that's out there and that's up from 40-some last quarter. So again, we're still doing very well in that business in spite of the price pressures that are out there.

Our next question will come from Kevin Slocumb with Soundview Group.

Hi. I'm just wondering if you could size the wireline business at this point since it was the one area where you had a significant divergence from your expectations. Just want to know to handicap it in the future.

The -- if you look at the telecom test part of our business, it's, uhm, it's roughly, you know, about, uhm, 40, around 45 percent to 50 percent wireline and a little bit, you know, about 50 to 55 percent wireless. Somewhere in that ballpark. That's in orders. So it's a little bit more in the wireless side than wireline. But roughly half and half.

And I think I'd want to discriminate even more as to what is long haul wireline and really affected by the difficulties in the service providers versus what's in enterprise, what's in metro, et cetera. Our best estimate is that roughly 14 percent of Agilent's orders and revenues are affected by that market.

Yeah, what we call wireline, by the way, is really a fairly broad category. We include router tests in that. We include a number of our OSS product lines that sell into the wireline market. So when you think about wireline, if you think about it as the long haul optical market, that's a much smaller part of our total business.

Our next question will come from Jim [INAUDIBLE] with CIBC World Markets.

Hi, guys. I greatly apologize if you have already covered this I had some technical problems. But on the, uhm, on the semiproducts, is there any way you can give us revenues maybe on a normalized basis for the transceiver unit, talk about maybe kind of order flow and, you know, how the success has been in fibre channel?

Well, we can't break out in -- in too much detail for you, but let me just say we have had a lot of success in our fibre channel business. The two gigabit fiber channel we think we are winning share there with the new products that we have introduced over the last year. So we're doing quite well. Our storage business is growing.

We think that that's one of the -- you know, that's one of the bigger growth areas for the semi-conductor products group businesses. But I can't really break out the specifics. You know, the tachyon chip is in there. There's some fiber, as well. And we would have to go back and dig through all of our numbers to get that, maybe at some time we can try to give you some sense of that. But we don't -- I don't have all that here.

Operater,we have time for one more question.

And our final question today will come from Paul Knight with Thomas Weisel Partners.

This is [INAUDIBLE] for Paul Knight. just one quick question. What is your tax rate over the next few quarters expected to be?

Our pro forma tax rate is we have -- if we have a loss and for this year is 43 percent. Beginning next year, we will have a tax rate of 31 percent.

This concludes today's question-and-answer session. I'd like to turn the conference back to our speaker for additional or closing comments.

We just want to say thank you for joining us today. We will be reporting our Q4 results on November 18th. We look forward to joining you on our next call. Thank you.

Thank you for your participation on today's conference call. You may disconnect at this time.