安捷倫 (A) 2003 Q2 法說會逐字稿

We were about to begin. Good day and welcome to the Agilent second quarter 2003 conference call. This call is being recorded. At this time are opening remarks and introductions. I would like to turn the call over to Mr. Hilliard Terry, Director of Investor Relations.

Thank you. Welcome to Agilent Technology's second quarter conference call. With me are Agilent's President, Chairman and CEO, Edward (Ned) Barnholt, Executive VIce President and CFO, Adrian Dillon. After my introductory comments, Ned will give his perspective on the quarter. After which Adrian will provide detailed commentary and performance in each of our business. After Adrian's comments, we will open up the call for your questions.

In case you haven't had a chance to review the release, you can find it on our website. In accordance with the new SEC regulation G, if during this conference call we use any non-GAAP financial measures, you will find on our website the required reconciliation. Additionally, I would like to remind you we may make forward-looking statement with the future of the company that involve risk and uncertainties. These risks and uncertainties can cause Agilent's results to differ materially from management's current expectations. We encourage you to look at the company's most recent filings with the SEC to get a more complete picture of the factors at work. Lastly, the forward-looking statements including guidance provided to the call today are only valid as of this date. The company assumes no obligation to update such statements as we move through the year. With that, I will turn it over to Ned.

Hello and thanks for joining us. Today I will comment on three topics. Our financial results, ongoing transformation efforts and our commitment to reach break-even. Overall, our financial results were mixed for the quarter. But we continue to make progress on transforming our company and reaching and operating break-even of $1.45 billion in the fourth quarter of this year.

First let me comment on our Q2 results. We are encouraged we achieved sequential growth in orders and revenue, especially given the global uncertainties that we faced during the quarter. Our orders were $1.53 billion and we are pleased with the strength in our semiconductor tests and semiconductor product businesses. As we expected when we talked to you in February, there was an up tick in our flash memory business compared to Q1. Also customers for semiconductor tests seemed to be gaining confidence that their business will be improving in the second half. In contrast to the environment during the last two years where most SOC, systems on a chip, orders were for a single unit. Customers this quarter began to order multiple systems. We continue to gain momentum in the semiconductor test marketplace with ongoing strength with graphic and chip sets while broadening our base in consumer and wireless markets.

In semiconductor products orders were strong for imbedded cameras, optical mouse ICs, and base opto electronic products which include LEDs, opto couplers and motion control censors. In communications tests, we achieved good orders in our OSS network management software business including several significant orders as large service providers work to maximize the value they can get from their existing infrastructure and subscriber base. At $1.47 billion our Q2 revenue was above the midpoint of our guidance and about flat compared with last year. Our orders and revenue are benefiting from our R&D investments. Recent new product introductions across businesses are contributing to orders, revenue and market share gains. To mention just a few, these include high [INAUDIBLE], systems on a chip semiconductor test modules. A wireless space station test set and new OSS solutions. Our on going innovation helps us maintain our number one or number two leadership position in virtually all of our businesses. Although orders and revenue came in near the top end of our range, cost of sales was higher than expected. And pricing pressures cut into our margin. We are running slightly behind our plan on our expense reduction goals.

To meet our commitment to achieve an operating break-even at $1.45 billion in Q4, we are concentrating on three major fronts. First, we are maintaining a strong focus on generating profitable orders and revenue. Winning business in this environment is a challenge. We are doing all we can to get more of our share of the business that's out there. Second, we were working to improve our gross margins. We were accelerating our plans to achieve cost of sales reductions by completing our work force management plans. At the same time, we are making careful decisions about pricing and what businesses we choose to go after. The third front is lowering expenses to achieve our goal of $1.45 billion cost structure by Q4.

In the second quarter, we reduce the structural cost by an additional $35 million and lowered head count by nearly 2,500 people. The work force reductions we have been implementing have lowered our people related expenses and we are following through on our commitment to complete the remaining and already announced work force reductions as quickly as possible. We reduced the number of employees by 12,000. Or almost 30% from our peak in early FY 001. We were exiting the second quarter at 32,000 employees and will achieve our goal of fewer than 30,000 employees by the end of this fiscal year. Some of our restructuring efforts were completed by the end the second quarter and will be reflected in our Q3 results. As we are taking actions to size our business appropriately, we are continuing to make significant progress on transforming our company. The ongoing rollout of our ERP system is on schedule.

In March, our semiconductor products group complete the its implementation a week ahead of schedule with no impact on operations. In the second quarter, we continued to the rollout of our new customer support system that went live in Q1. This transformation of our IT activity is continuing without significant disruption to our business, and on track to complete our new systems and turning off our old legacy applications. We are continuing to make progress on other operational initiatives as well. Consolidating manufacturing, increasing our presence in low cost countries. Outsourcing functions and processes where it makes sense. And reducing the physical space we use. As we execute our short term plans and continue our long term transformation, we remain committed to achieving a break even operating break even of $1.45 billion in the fourth quarter of this year. We are not wavering on our resolve to execute the plans we talked about to reach our cost structure goals. I'm confident we will reach them.

Looking ahead, we don't see any material change from the recent trends in our end markets. And we expect to achieve Q3 revenue in the range of $1.45 to 1.55 billion. We expect earnings before restructuring and amortization charge to be in the range of a loss of 10 cents per share to operating break even in Q3. In closing, we remain optimistic about Agilent. Our company continues to be a technology market leader and I'm confident we will emerge from this difficult period as a stronger and better company. Thank you. Now let me turn it over to Adrian.

Thank you. Good afternoon, everyone. As Hilliard indicated, I will give some perspectives on Agilent's overall financial results and review the performance of our business segments. First a note. Because there was some confusion three months ago, let me remind you that all of the financial comparisons we will be discussing today are to the numbers as reclassified in our press release of January 21st. Starting first with net orders, we achieved orders of $1.53 billion, up about 12% sequentially. So down 4% from the $1.6 billion in net orders of one year ago. Recall, however, that last year's second orders were the strongest we have seen since the first quarter of 2001. They were particularly strong because of the spike up in our ASICs orders and preorder in anticipation of the EPR implementation. This quarter's orders of $1.53 billion were the second highest orders we have seen since the beginning of 2001. Revenues were $1.47 billion. About -- up about 1% from a year ago. Up about 4% sequentially. And indeed they were towards the high end of the 1.4 to $1.5 billion guidance that we provided three months ago. That brought our book to bill ratio to 1.04 above the .96 of the first quarter of this year. Gross margins in the quarter were 39.0% up about half a point sequentially, down about half a point from a year ago. Gross margins were about 1 to 2 points weaker than we would have anticipated given the revenues we achieved. As Ned suggested, we continue to see severe pricing pressures across the board.

But the pressure was particularly acute in two areas. Semiconductors, where margins were off four points from a year ago. And if our test solutions were the installation and maintenance business -- where we are facing extraordinary pricing pressures from competitors. In the other businesses, despite the tough competitive environment we were seeing the improvement in gross margins that we expected. Before giving you additional details on operating expenses, let me talk about two subjects. First is the impact of currency on our overall results. Overall, currency is neutral to our results with both revenues and cost on a year-over-year basis up about $50 million because of the lower U.S. dollar. Sequentially, our cost and revenues are both up about $15 million due to currency. Our cost and margin ratios are unaffected by currency, but the dollar comparison with prior periods are affected making it look like our costs are not coming down as much as they should be given the ongoing restructuring actions. Overall, year to year, revenues effective currency on revenues is $50 million. The effect on costs to goods sold is $20 million and operating expenses about $30 million. Sequentially, revenues are up about $15 million. Cost to goods sold up about $5 million. And operating expenses up about $10 million. Again, due to the lower dollar.

One other thought on expense comparison, has to do with seasonality. Agilent has a normal seasonality to its results with a relative weakness with the first and the third quarters and strength in revenues and expenses in the second and fourth quarters. Because of this, sequential comparisons in an otherwise flat market can be misleading. This was particularly true in comparing the first and the second quarters of this year because between Thanksgiving, the holiday shut down and Chinese new year, we had fully nine more working days in the second quarters just ended than in the first quarter this year. Especially with revenues essentially flat I would suggest that year to year comparisons are a better measure of our progress than sequential. Our R&D spending in the second quarter was $268 million or 18% of revenues that compares to $303 million a year ago, or 21% of sales, an improvement of 3 points or $35 million. Again, adding back currency,R&D spending is down about $45 million year to year. SG&A costs were $486 million in the quarter. Down 2% from the $494 million of a year ago. In dollar terms, they were down $8 million from last year. Exclude the impact of currency and SG&A costs were down $28 million from last year and finally, remember, we are spending about $45 million more in the second quarter of this year than a year ago to continue the ERP and CRM implementations. Subtract out that $45 million and year to year our SG&A costs are down $73 million or 15% from a year ago.

Now the comparisons of IT costs, currency and seasonality aside, expenses ran about $15 million higher than we expected because of implementations delays in our restructuring program. And as he suggested, those savings have not been lost and we expect to get back on plan in the second half of this year. Turning to taxes, our pro forma year to date tax rate of 50% compares to 44% in the first quarter. The impact of this year was up about 5 cents in the second quarter proforma. The change is due to our geographic results with more profits coming from our low-tech jurisdictions and higher losses from our higher tax rate locations. Our GAAP year to date tax rate of 55% was unchanged from the first quarter. So, overall, we had an earning before restructuring net loss of $72 million in the quarter or 15 cents per share adjusting for the tax rate we would have come in 20 cents per share loss at the high end of the 10 to 20 cent range that we indicated. We had goodwill and intangible spending charges or $12 million in the quarter and restructuring charges of $131 million. We also had a tax benefit of about $69 million coming up with a GAAP net loss of $146 million or 31 cents per share.

Turning now to the balance sheet and cash, during the quarter we think we did a good job of managing the balance sheet and minimizing cash consumption. In addition to the $146 million of GAAP loss, we consumed about $45 million in other networking capital. So net cash use and operations was a negative $191 million. However, in the quarter, we did spend $133 million in cash restructuring. We also had $51 million of income tax payments related to timing. For example, on the prior quarter we had a $90 million refund. If you adjust for those two items, cash restructuring and the timing of income tax payments, our adjusted cash from operations was actually only a negative $7 million. Capital spending was also under good control during the quarter. Only $38 million. That's nearly $50 million lower than either spending last year at this time or our rate of depreciation at $87 million. In addition, we generated $28 million from reducing our working capital. Our receivables DSOs improved by two days in the first quarter by 57 days. Our inventories improved more substantially, 7 days from the first quarter and 22 days from one year ago at only 114 days on hand. Overall, we ended the quarter with $1.53 billion of cash and equivalence on the balance sheet.

Turning to test and measurement. Net orders in test and measurement were about $608 million. Up about 2% sequentially but off about 5% year to year. COM's test was the weaker of the two segments. COM's test was off by 1% sequentially and off 7% from the prior year. In communications test we saw flattening of business levels in Asia due in part to the concerns about SARS and to the temporary wireless handset bulge that will take awhile to burn off. To date, we have seen no backing off of the Asian capacity expansion plans but we expect the balance of the year to be flat and R&D wireless and LAN to be a larger portion of our test mix. We saw weakness in wireless infrastructure and in the wireless markets. On the positive side, we saw a couple of significant OSS orders during the quarter.

General purpose orders were up about 11% sequentially. We did see some pop after the sluggishness and the pause in the first quarter related to the geo-political risks and general purpose test was about flat from a year ago. Overall, we continued to see soft purchases in aerospace and defense because of the war impact. Over time, we expect demand for high test -- for high speed test systems for radar modules, surveillance and satellite systems to spur or growth, but we haven't seen it yet with the war focusing on bullets and not on systems. Our logic systems business did see some strength from the computer and storage markets during the quarter. And we saw share gains as a result of good demand for our new 6GHz scope and probe. And both in COM's and general purpose test, pricing pressures remain fierce as competitors continue to be aggressive, and as I mentioned earlier, we saw acute margin pressures particularly in those businesses. Revenues during the quarter were $652 million, flat versus the prior year and flat sequentially as well. Book to bill of .93 compares with a.94 in the first quarter. Results of our company wide restructuring show up better in this segment than in elsewhere despite the impact of currency and seasonality. The second quarter operating loss of $103 million was $29 million better than the first quarter on only $19 million higher revenues, for example. And year to year the operating loss was reduced by $69 million despite $8 million lower revenues.

Turning to automated test, as we expected, automated test rebounded from the first quarter air pocket caused by the lumpiness of flash memory test orders. In fact, total automated test orders at $219 million were the highest we seen since the first quarter of 2001. SGE orders, specifically, were up more than 100% sequentially and were up 12% from the prior quarter. And again as Ned suggested for the first time in two years we are seeing multiple SOC systems orders for delivery and months instead of one or two for immediate delivery that we had seen up until now suggesting our customers are beginning to gain confidence in their businesses. In part that's driven by utilization rates in Taiwan that are up 90% for our 93K test systems. And we continued our record of design wins with 119 in the second quarter compared to 104 wins in the first quarter and that 119 was three times what we saw a year ago. Largely due to new wins in the consumer and wireless markets. Revenue of $153 million in the quarter was up 13% sequentially and about flat with a year ago. Our book to bill at 1.43 was substantially higher than the 1.21 which was recorded by semi for the back end test systems. The second quarter operating loss of $37 million was affected by a $5 million inventory charge. Adjusted for that charge operating results were essentially equal to last year on similar volume but compared to the first quarter, they were $16 million better on only $17 million higher volume.

Semiconductor products had net orders of $420 million. Up 10% sequentially but off 12% from the prior year when we had this spike in hard copy ASIC orders. If you adjust for the hard copy ASIC orders, we were up about 10% sequentially but we were up 2% from last year at this time. Virtually all of the strength we were seeing is in the personal systems markets. Networking was flat sequentially and off 8% from a year ago. As growth and demand for storage products was offset by weakness in the land networking space. Personal systems, at $290 million was up 16% sequentially and was off 13% from a year ago. But again, because of the much lower hard copy ASIC orders. In imaging components we saw strong order demand for optical mice and the continued ramping of orders for our imbedded camera solutions. Hard copy ASICs did rise 10% sequentially and our F bar filter and EP power bar amp modules went up sharply.

Revenues for the quarter were $376 million, about flat sequentially or year to year. Our book it bill was 1.12 up from 1.04 in the first quarter. Though down substantially from the 1.28 of a year ago. Operationally, we continue to struggle in this segment with a rapid rate of ASP erosion, particularly in fiber products, and the continued ramp of the F bar and EP hemp products increased our costs about $6 million compared to last year. In April we ended production at the Newark, California lab as we suggested we would and we closed the facility.

Life sciences and chemical analysis-- not a lot has changed in this segment in the past three or 12 months. Net orders of $280 million were 4% above the first quarter but down 2% from a year ago. Chemical analysis was the relatively stronger business up about 7% sequentially and flat year over year. Orders for life science products were down about 4% and were flat sequentially. As pharmaceuticals companies spending continue to be subdued, as did spending for government and academics. Revenues of $286 million were up about 4% sequentially. 5% year over year. Book to bill was still just below 1. Because of the seasonality of operating expenses, operating profits at $20 million during the quarter, were off $14 million sequentially, almost identical to the quarter pattern we saw last year at this time. Compared to last year, profits were unchanged despite $14 million higher revenues because of increased R&D spending in the life sciences and temporarily higher IT expenses associated with our CRM implementation.

Finally, turning to guidance, Ned discussed our third quarter guidance. Revenues of $1.45 to 1.55 billion or about $50 million higher from the second quarter range for guidance. Our pro forma guidance of a loss of 10 cents to a break even is 10 cents better than the range we indicated in the second quarter, with perhaps 3 1/2 cents of that improvement due to higher volume. 6.5 cents of the improvement, or roughly $60 to 70 million, is due to the accelerated pace of restructuring that is well under way. Additional improvements will come from higher gross margins and even faster pace of spending reductions including getting what we didn't get in the second quarter. For the fourth quarter, we remain firmly focused on achieving the $1.45 billion operating break even. So with that, let me turn it back to Hilliard.

Thanks. Operator, at this time, we'd like to begin the question and answer session.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, press the star key followed by the digit 1 on your touchtone telephone. If you are using a speaker phone, please turn off your mute key to allow your signal to reach our equipment. Once again, that's star 1 to ask a question. We will take our first question from Arindam Basu from Morgan Stanley.

Question for you on revenues from back log versus turns business this quarter.

Revenues during the quarter were reduced by $60 million.

So could you repeat that?

Revenues from bag log was reduce by $60 million during the quarter.

Okay. And then if you could talk a little bit about the grey market impact on pricing and if you could size the market particularly in the general purpose test arena.

As I said before, the grey market continues to be an issue, even as a lot of people have excess capacity and been dumping product on to the market. So we see a particularly in areas like optical tests, mid [INAUDIBLE] testers, a lot of the 2.5 gigabyte, 10 gigabyte, light wave products. A large grey market for that. And there is also a large grey market for board testers. Again with a lot of the contract manufacturers putting used equipment on to the market. If you look at the general purpose test area, it's not as large. Proportionately. It's certainly out there. I don't have an exact percentage. A lot depends on the rate of change of technology, and some of these products are general purpose enough that people feel they can always have a need for them sometime. Where as in the optical area it was clear that people were not going to have a need for these products for a very long time. It's a factor out there. Frankly, I don't hear about it as much in the general purpose area as I do in the optical area or board test.

And then on the ATE side, you had a great quarter. Could you talk about what drove the bookings increase this quarter? What was the percentage from flash and the percentage from SOC and what you think that will look like next quarter.

I don't know that we always give a quote on how much comes from each one of the businesses. Both segments were up and SOC was particularly strong. SOC orders were up 33% over last year. And up over 100% sequentially. And we are continuing to expect that the first quarter was an air pocket and we will see steady or slightly higher orders over the remainder of this year on a quarterly basis.

And remember, flash, certainly wasn't an anomaly in Q1 as we had zero orders. And our flash business did recover and we expect it to continue to remain in roughly the levels that we are running in the second quarter.

Our next question from Deane Dray from Goldman Sachs.

If we can go to the pricing pressure comments in we could. It sounds as though from your commentary the pricing pressure actually worsened in the quarter so would be interested in hearing what you are expecting in the way of pricing issues for the third and fourth quarter. Are you expecting it to abate? Worsen? What has been your experience and is the stage of this cycle in terms of pricing by your competitors?

This is Ned. Yeah, I would say remember what we are talking about is the -- margins in our revenue that we ship and very often those were products that we received orders from late last year in our first quarter. As Adrian mentioned, we had a lot of pricing pressure in our semiconductor products area, particularly the products like the fiber optic components. Even some of the opto electronic devices. ASICs, et cetera, and then in the test and measurement area, we mentioned the installation of maintenance products in the communications test area. But also remember as we do get a lot of competition from the grey market, not that we can ever discount that much, but it certainly creates some additional pressure on discounting as we try compete a little bit with the used products out there. Is it getting better or worse? I would say in the test and measurement area, it's relatively constant. We have seen it pretty much at the same level over the last three or four quarters. I would say in the semiconductor products area we continue to see ongoing pricing reduction as you would in any semiconductor product as they tend to follow Mores law, and there's certainly a lot of smaller competitors that are fighting for survival. Semiconductor products will continue to be a challenge and we were taking actions to keep working and lowering our cost of sales there. Our fixed costs and our manufacturing organization. Test and measurement, we think we are probably at some kind of a plateau on pricing pressure.

And then second question would be for Adrian. Could you remind us or update us on the free cash flow goals for the balance of the year? I was interested in why in your calculation of the adjusted cash flow that you would be -- were you excluding the taxes paid?

Yeah, I was. I wasn't trying to make a major point out of that, obviously with the NOLs that we have we will pay little in tax -- cash taxes for the foreseeable future. So there is always a lot of lumpiness around the $100 million of refunds that we got last quarter versus $52 million of payments this quarter. And that's all I was trying to normalize for. If you put that back in, we were at about a $38 million operating cash negative. Our goals for free cash flow in the second half of this year -- when you add in the continuing restructuring and everything would be that we would be somewhere between a 50 and $100 million cash burn in the third quarter and equivalently cash positive in the fourth quarter.

Okay. And last question would be, what's your expectations for financing needs over the next couple of years based upon your outlook for cash break even?

We believe we have no financing needs in the foreseeable future based on our cash break even.

Thank you.

To Steven Koffler with Wachovia Securities.

Two quick ones. Did I hear you say that there was some increased ordering at some point during the quarter for printer modules related to the ERP wrap up?

No. What I said was that there was ramping a year ago at this time. If you looked at our orders a year ago, we had a big spike in hard copy ASIC orders because HP was coming out with its whole new line of printers. In addition, we were telling our customers that we were beginning a major implementation of ERP in June of last year and if they wanted those for sure, have those products out before them they ought to order early and they did. That's the spike from last year.

Thanks for repeating that. And then did you say that there were 9 additional days in the business days in the second quarter relative to the first?

Correct.

How many days were there in Q1 and Q2 and how many will there be in Q3?

I didn't do the arithmetic. Depends if you do a 90 or -- sorry, 7 day week or a five day week. The increase was 11 to 14% depending on which arithmetic you wanted to do. In the third quarter, there will be about three days fewer than in the second quarter.

Remember, these are not calendar days. These are Agilent days. We took a couple of weeks off at Christmas. We had Chinese New Year's where people take off in Asia. And several of our organizations are planning to take some time off around Fourth of July, depending on their back log situation. It's hard to give you exact count because it depends on the business. In general, we are talking about the number of work days that we have for shipments and revenue.

So Q3 will be a lot more like Q2?

It will be more like Q2 than was Q1.

Thanks a lot.

Our next question from Max Schuetz with Credit Suisse First Boston.

Falling on some of the earlier questions, I was wondering if you could talk about the pricing in the competitive environment in the semiconductor test specifically and the strength was tied more to shared gains or reflective of the industry.

You are breaking up a little bit. Let me guess at what your question was. What was the level of pricing competition in ATG was the first part. The second part was did we expect our jump in orders was share or market?

Right, right.

On the first one, the semi test business continues to be very tough competitive pricing as well. Many of you saw the announcement last Friday from one of our competitors, people continue to restructure all over the place in this business to try to lower their break evens and to get whatever business is out there. We have been able to compete mostly on capability rather than having to lead with price. On the other hand, we had had to respond to what at some times is very, very aggressive pricing. As to whether it was share or market, you really had more to do with the lumpiness of the flash business, our flash customers didn't order in the first quarter. They came back in the second quarter and ordered. In fact, our back logs are quite good at this point. I would say it was more -- the lumpiness of our flash memory test orders than any fundamental increase in our share at this point.

And then, can you walk through the cost this quarter tied to the ERP and CRM and when you expect that to be completed in terms of the costs.

Our ERP programmatic cost were $45 million higher this quarter than a year ago second quarter. That's down just a little bit from the first quarter when it was $50 million or a bit above that. We would expect something in the range of the $40 to 50 million per quarter to continue in the third and then in the fourth quarter when our implementation will be complete of our major systems and will be able to ramp that down beginning in fiscal '04.

Thank you.

We'll go next to Adam Wolfman with Lehman Brothers.

Hi, it's Adam Wolfman for Ed White. You mentioned in your commentary concern about wireless inventory and the effect it was having on your wireless test business. I was wondering if you could elaborate more. And touch on what impact that could have on your semiconductor products, your wireless semiconductor business, as well as your ATE business income in quarters.

I think the inventory we are talking about is primarily as you know a lot of the Asian manufacturers were in the process of ramping. There is a lot of new manufacturers that were ramping over this last year or so. And we saw a pause in that in the second quarter. I think part of it was related to just a general caution about not overshooting. But, frankly, SARS had a big impact as well. The number of cell phone calls were down and many countries in Asia, the number of companies that were actually using -- other companies from outside of Asia were slowing down their plans to start factories in China and other places because of travel restrictions. In general, I think there is an overcapacity right now and I think we view it as somewhat of a pause in the market. As Adrian said, we expect that the outlook for wireless test, in general, be relatively flat from the first half of this year into the second half of the year. Roughly the current run rate.

Okay. Next I was hoping you would touch on the impact of the closing of the Newark facility as well as the continued ramp of the Fort Collins facility. What we would expect from a cost structure stand-point and benchmarks that we should consider in measuring the progress there.

We think that the additional costs of keeping the Newark lab open for 6 additional months was roughly $6 to 8 million per quarter. And that's just the direct cost of keeping that facility open. That has now ended with the shut down and so at a minimum you should be expecting to see that improve. And obviously as we continue to ramp in Fort Collins and get better efficiencies, hopefully we will be able to do considerably better than that.

We will go next to Richard Eastman with Robert W. Baird.

Could you explain, what was the impact of currency on orders? In the quarter?

Order of magnitude is the same as revenues. $50 million year to year. About $15 million quarter to quarter.

And then also, when I look at the ATE group, we obviously had a first quarter that as you said hit an air pocket. We had some makeup in orders obviously here in the second quarter. If I averaged the first half where at 167 in orders, is that a number that flatlines from here? Or are we seeing some better activity there?

We think that we are seeing better activity here. We would be more inclined to flat line the second quarter than to flatline the average the two.

There is some unusual situations in Q1. Due to the timing of some orders. We do think -- remember that most of our testers are running at over 90% utilization. As the business does begin to turn around a little bit here in the second half, if you read all of the SIA data and others on semiconductor projections for the second half, we should see some benefit that. And that would put it more like the run rate that we had in the second quarter, not the first quarter.

So up around 200 million in orders a quarter is what you are saying?

Order magnitude, yes.

One last question. I'm trying to reconcile -- we are talking about pricing in certain aspects of the business. At the same time we are talking about market share gains. Are we the aggressive pricer in some of these markets?

You know, it's hard to tell. First of all, if you look at our semiconductor products activity, we have committed to very aggressive price reductions over time with our customers because in many cases we are by far the largest supplier. We have a very large share of the fiber optic component market. We have economies of scale that a lot of other people don't have. We have very specific plans to pass that along to our customers as much as possible. Now, again, there is ongoing pressure from customers and competitors to bring prices down even more. And sometimes we respond to that and sometimes we don't. There are times when we choose to walk away from business if we don't think it's going to be a good viable economic business for us to take.

So we are not just aggressively buying market share. I don't want you to get that impression at all. We are not. We are walking away from business if people want to make crazy ridiculous bids on a certain piece of business. On the other hand, we do have the capability because of the manufacturing scales that we have that we can offer very attractive prices and we have been to our customers where we need to.

And you are comfortable with the pricing environment as it is today that our cost reduction plans can continue to get us towards that break even by the end of the year?

I mean, exactly. As I say, a lot of this is factored into our plan. We are running a little bit behind where we wanted to be. We still have plans in place to reduce our cost in such a way to accommodate the pricing environment that we are in.

Next to Paul Knight with Thomas Weisel Partners.

What was the head count at the end of the quarter?

32,000.

And what do you think your cash level will be when you get to this break-even juncture.

About 1.4 to 1.5.

Any comment on the SARS situation, good or bad?

As Ned said earlier, we think that SARS may have had some impact on the second quarter. There were some delays in orders, some cancellations as people just wait out seeing what's going on in sars and additional capacity that was to be installed in China just got put on hold. Some of our test equipment was put on hold at the same time.

I think the real concern about SARS is how long the situation lasts. I think most people felt that while there was an impact in the second quarter, it was relatively minimal impact. If we are still out there in three, five months with serious SARS issue in Asia, it could have a larger impact and that's something we are all watching very closely.

And then lastly, could you quantify a little bit the CRM implementation cost of a life science operating line?

That was about a third of the delta from last year.

Okay. Thanks.

Our next question from Richard Chu with SG Cowen.

A few quick things. Back to the ERP and customer support. You said that the $45 million is incremental year over year.

Correct.

Can you think about in absolute terms six to nine months from now effectively 49 million disappearing from the expense line?

That's correct.

Actually, more than that. We expect to get savings from the $45 million.

Okay. Number two, to get to $1.45 billion break-even by Q4, you have to come down about 200 million in cost expenses from current. Can you roughly give us a sense of how much of that will be driven by already made restructuring decisions versus what has yet to be implemented? And second, any other unusual factors such as structural changes in pricing, ramp up efficiencies and SBG, et cetera.

We announced last February our latest round of work force reduction which brings up -- which is a total of about 4,000 people. That brings the total reductions somewhere in the neighborhood of around 14,000 from 44,000 at the peak to about 30,000 at the end of this year. The majority of those people certainly the most earlier ones are done. Of the 4,000 we announced in February, a majority are either gone or have been informed and have exit dates which will occur in Q3 and in some cases in Q4, where we are moving manufacturing around or we want to complete an R&D project, et cetera. There are exit dates that extend out to Q4, but it's a small number of the total.

In general, there are other cost savings, don't forget. We are closing facilities. We talked about closing the Newark fab. We are also taking a lot of cost out of our IT and IT support as we outsource more and transition some of that business. And we are continuing to attack a lot of our discretionary costs in general. For example, in the last several months we have gone to web-based auctions for some of our indirect procurement. Office supplies and things. We are getting significant savings. We are seeing savings in those areas in addition to just the work force reductions.

Richard, one clarification. Your arithmetic is correct at $200 million. We are going to add back the $50 million for the ERP finishing that in the fourth quarter. It's really $150 million from here. Of that $150 million, as Ned was suggesting, well over three-quarters of that is identified and is under way and not completed.

ERP and it factors will have its impact in Q4 rather than in the beginning of fiscal '04?

No, no. Let me rephrase that. The 1.45 that we alluded to has always excluded the ERP implementation costs. That implementation will not be completed until after the end of the fourth quarter.

That's fine. What accounted for the $14 million in positive other income in the quarter?

That was mostly minority interest.

Do you expect that to continue?

Between 7-14m. As you can see, it's lumpy. In that range.

Finally, you made a comment about 400 basis point negative variance on semiconductor margins despite comparable volumes. Is that -- you mentioned a number of things and I'm trying to get a sense of that is a transient here as you complete the transition to Fort Collins. And how -- or that is a function of the F bar situation as opposed to other structural competitive factors that will remain.

Richard, I would say there is a combination of both. As I said, $8 million just in direct costs has to do with having to keep open the Newark fab that will no longer be there. There is some additional costs for the ramping of the F bar and ep hemp. And the pricing on the fiber business has been really tough. We are hoping that's not going to continue but we aren't counting on it getting better. That's part of the reason for the structural reduction in margins year over year.

Our next question from Shilas Jaley with [INAUDIBLE] Securities.

How well you are tracking in terms of your outsourcing targets like what [INAUDIBLE] And how do you look at going forward?

Could you repeat the question? I couldn't quite hear you.

I was wondering if you could comment on your outsourcing targets how you are tracking compared to the targets you had set for yourself, particularly [INAUDIBLE] and if you can get some color on the outsourcing of the complete systems.

Well, as far as the printer circuit board, we have outsourced virtually all of our printer circuit board assembly. We have one remaining shop in Spokane, Washington, that we were in the process of closing down in the second half of this year and that's the last of our internal circuit board shops. And then we will be 100% out -- outsourced. It's already 90%. We have outsourced some finished products. Some of our system products like board testers as well as some of our instrument products. Where we can do that, mostly at the low end or some of the less sophisticated products. And we expect it will continue to do some of that, but I would guess that we already done the majority of what we plan to do there. We always believe that we will keep the bulk of our particularly our instrument products in-house, but outsource the lower levels assemblies and sub assemblies and keep the final assembly and test in-house with the exception of maybe 20 or 25% of our overall revenue.

We will take a follow-up from Adam Wolfman from Lehman Brothers.

I was hoping you can talk about how much restructuring expense you factored into the $50 million cash berm projection for Q3.

About $75 million in the $50 to 100 million cash burn in the third quarter.

And I was wondering in the past you talked about setting goals for all of your business and not allowing any cost fertilization with the hope that all of the businesses would be profitable and meet both your growth and return invested capital projections. Wondering if you believe most of your business will be profitable by the end of the year or if you are going to allow some of them to incur losses. And also if you identified any units which may not be able to meet the target for revenue growth, long term revenue growth and return investment capital.

We expect every one of our major four. The segments that we report to be profitable in -- by the fourth quarter of the year. Now, within that, there may be one or two businesses that are not profitable, but you always have a portfolio of businesses and you try to make sure it balances out. But we don't expect any one of our major four businesses to subsidize any of the other and we expect all of our major businesses to be profitable.

Operator, we have time for one last question.

We will take our next question from Arindam Basu from Morgan Stanley.

Just had one last follow-up. Want to ask about sales person compensation. I think previously sales people were compensated on order flow and discussion of shift to compensation based on revenues and payments, and I want to get a sense of the status of that.

We are very much moving in that direction. We are installing a new incentive compensation system that we will have up and running partially by the first quarter of this coming year, '04, and we will have it completely installed by the second half of '04. With that we will begin to pay some of our sales people in the first half on revenue, not just orders, and by the end -- by the second half of next year we will be able to do that in virtually all of our businesses in we choose to.

Thank you very much.

With that, we will close the call and we look forward to speaking to you when we report our Q3 results on Monday, August 8th. Thank you for joining us.

That concluded our today's conference. We thank you for your participation and you may disconnect at this time.