安捷倫 (A) 2003 Q4 法說會逐字稿

Good day and welcome to the Agilent fourth quarter 2003 financial results conference call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the director of investor relations, Mr. Hilliard Terry. Please go ahead, sir.

Thank you and welcome to Agilent Technologies fourth quarter conference call. With me are Agilent's chairman, president, and CEO Edward Barnholt, and executive vice president and CFO Adrian Dillon.

After my introductory comments, Ned will give his perspective on the quarter and the current business environment, then Adrian will provide detailed commentary on the financials and performance of each of our businesses. After Adrian's comments, we will 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.

In accordance with SEC Regulation G, if during this conference call we use any non-GAAP financial measure, you will find on our website the required reconciliation to the most directly comparable GAAP financial measure. Additionally, I'd like to remind you we may make forward-looking statements about the future financial performance of the company that involve risks and uncertainties. These risks and uncertainties could cause Agilent's results to different 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 all the factors at work. The forward-looking statements, including guidance provided during this call today, are only valid as of this date. The company assumes no obligation to update such statements as we move through the quarter.

Lastly, I'd like to remind you that we will host our annual New York City Analyst Day on Tuesday, December 9th. Please feel free to register on our website or contact a member of the Investor Relations team for additional information. With that, I will turn it over to Ned.

Thanks, Hilliard, and welcome everyone. We're delighted to talk with you today about our excellent fourth quarter results. We work hard to return to profitability. I'm very proud of our performance. Today I'll give highlights of our results and talk about our accomplishments in improving our operations. Then I'll give an overview of our markets and comment on our guidance for Q1.

A real highlight of Q4 is reaching our goal of an operating break-even cost structure of $1.45 billion. During each conference call with you throughout fiscal year '03, we've emphasized our commitment to this goal, and we're pleased to reach this milestone. We also are very happy with orders, revenue, and earnings above our expectations. Orders of $1.73 billion were up 18% over the previous quarter, and 16% year-over-year. Revenue of $1.68 billion was up 12% sequentially and down 4% compared to last year's Q4 surge following our new ERP implementation in the third quarter. We earned attractive profit on the additional revenue we realized over the operating break-even cost structure.

GAAP earnings were $13 million or 3 cents per share. And non-GAAP operating net income was $71 million or 15 cents per share. We continue to feel very good about our gains in market share. Our investments in new products continue to help orders and revenue across our businesses. Our performance on asset management and cash flow was also outstanding, and Adrian will provide more details.

Our work to strengthen our operations contributed significantly to our Q4 results. The goal for each of our businesses is to be best in class relative to our peers. Q4 results demonstrate the success of our efforts to reach that goal. Three out of our four business segments now operate at or near best in class level in terms of ROIC and other business measures.

During the quarter, we continued the transformation work we've discussed with you. And we've experienced savings from our work to consolidate manufacturing into a fewer number of sites, increase our presence and lower cost areas, outsource selective functions and processes where it makes sense, and reduce the physical space we use. The rollout of our ERP and customer support and service systems continued on plan. We'll talk in more detail about these and other topics at our Agilent Analyst Day, December 9. In terms of our work force reductions, we ended the fiscal year with 29,000 employees. About 7,000 employees left the company in fiscal year 2003, including 1,000 in Q4.

I'll turn now to our markets. Our fourth quarter is seasonally strong, but in addition we saw signs of an upturn in semiconductor products, automated tests, and life sciences and chemical analysis. Consumer demand contributed to order growth in semiconductor products, automated tests, and wireless tests for cell phone handsets and other consumer electronic devices. Demand also increased for new solutions for cameras, games, and phones that require more complexity in components and testing solutions.

In semiconductor products demand was strong for optical mice and mobile solutions, including cameras, FBAR duplexer's, and EPM hand modules. So far we've shipped 20 million FBAR duplexers and have increased shipments to a rate of more than 2 million per month. This break-through technology is designed into 9 of the top 10 hand sets of US CDMA phone manufacturers. In automated tests, customers showed more confidence and placed orders for multiple systems and systems on a chip and flash testers.

In Life Sciences and Chemical Analysis, demand was strong for new and refreshed product families that contributed significantly to our sequential and year-over-year order growth. While we're pleased with the market strength we've seen, we remain cautious. In all our markets, pricing pressures continue, although the overall impacts of the gray market are beginning to decrease.

Going forward, we're continuing to carefully balance financial discipline with growing the top line and capturing opportunities as markets recover. Up to this point, our goal was to achieve profitability. Now our goal is to sustain profitability and capture new opportunities to grow the top line. We're focused on the future with a strong management team and have recently added or promoted two very talented new leaders. YONGSONG is senior vice president and general manager of our semiconductor products group. He has skills, experience, and deep knowledge of the semiconductor industry that will enhance our leadership position in advanced semiconductor solutions. Darlene Solomon, vice president and director of Agilent Laboratories, has contributed significantly to the growth and development of our Life Sciences business. Her strong technical background, solid business management experience, and enthusiasm for technology make her an exceptional choice for this important role. It's a real pleasure to welcome YONG and Darlene to their new roles.

In conclusion, a lot of people ask me if I'm ready to declare the upturn in the economy. While we're seeing the early stages, we still believe a recovery will be gradual. As customers show more confidence in their orders, we're well positioned to gain additional market share. Whatever happens, we intend to stay our course. We'll continue to bring out innovative new products, help customers succeed, and keep tight control on costs and expenses. And we'll appreciate any tail winds from the economy if these continue.

Our guidance for the first quarter is for revenue in the range of 1.55 billion to $1.65 billion. We expect earnings before restructuring and amortization charges to be in the range of 5 to 15 cents per share. Now I'll turn the meeting over to Adrian.

Thank you, Ned. Good afternoon everybody. As Hilliard indicated I'd like to provide some perspectives on Agilent's overall financial results and review the performance of our business segments.

As Ned has already indicated, we believe that in the fourth quarter Agilent met its performance commitments in a number of different dimensions. First and most fundamentally, we achieved the $1.45 billion operational break-even that has been our primary objective since early this year. Second, our orders, revenues, and profits all came in above expectations, and we realized 5 cents per share on the additional volume beyond our revenue guidance or a 65% incremental. We brought down our level of incremental spending on the IT programs ahead of schedule to around $20 million from the 40 to $50 million quarterly rate that we have been spending. Fourth, we met our commitment to being cash flow positive, generating $170 million of free cash flow from operations during the quarter. And fifth, three of our four segments reached levels of return on invested capital that are at or near our long-term goals for performance through the economic cycle. We believe that all of these form the foundation for sustained profitable performance in the quarters and years ahead.

Our net orders for the quarter were $1.73 billion, up 16% year to year and 18% sequentially. Geographically, there was -- orders were up across the board but with particular strength in Asia Pacific, which was up 28% year to year. Sequentially, both the Americas and Asia Pacific were up 20%. Revenue was $1.68 billion, down 4% from a year ago, but $75 million above the top end of our guidance.

We had a book to bill of 1.03 versus 0.86 a year ago, or 0.98 three months ago. You'll all remember and Ned mentioned earlier that a little over a year ago we had a major implementation of our ERP program which caused a disruption to our revenues in the third quarter and then a surge of about $71 million in the fourth quarter a year ago. If you adjust for that impact, our revenues of about $1.68 billion were up 1% from last year. Again, book to bill, 1.03.

Currency. Currency had no impact on Agilent's overall operating results because of our hedging strategy, The year to year impact of a declining US dollar was to increase reported revenues by about $27 million or about 1.5%. Sequentially the impact on revenues was about $3 million.

Looking at gross margins, we achieved about a 44% gross margin in the fourth quarter, up 2 points from last year and up 3.5 points from the prior quarter. Based on a 65% decremental, gross margin should have been off about a percentage point from last year. Instead, they were up 2 points, showing the cumulative benefits of the restructuring over the past year. Sequentially, our gross margins should have been up about 2.5 points based on volumes. Instead the margins were up 3.5 points.

The competitive environment remains really tough, but for the second consecutive quarter we did not see any further material deterioration in the level of discounts compared to prior quarters. And in the grey market, there are more signs that the great overhang of test equipment is being worked off.

Turning to operating expenses, we had R&D spending of $218 million during the quarter or 13% of revenues. The $218 million was off 27% or $80 million from one year ago. Compared to the prior quarter, R&D spending was down 3%. SG&A costs at $394 million were only 24% of revenues and were off 15% from the year ago. Again, compared to the prior quarter, down 3%. So total change in operating expenses year to year, a drop of $150 million. In fact, they dropped $21 million just in the last three months. Note that for both R&D and SG&A we are now at levels consistent with our long-term operating model at 12 to 13% and less than 25% respectively. For taxes, the pro forma tax rate in the fourth quarter was 50%. For 2004 you should assume a 31% pro forma tax rate.

So as Ned said, we earned 71 cents -- excuse me, $71 million on a pro forma basis or 15 cents per share compared to basically a break-even last year at this time and a 2 cent loss compared to three months ago. Reconciling from pro forma to GAAP we had about $9 million of goodwill and intangibles charges, about $58 million in restructuring charges, and $64 million of taxes and miscellaneous, getting you GAAP next -- net income of $13 million or 3 cents per share.

The GAAP tax rate in the fourth quarter earnings of 83% looks a bit squirely, but that's because of a year to date tax catch up on the rate. We had been assuming a 52% GAAP benefit rate for the full year, but the actual turned out to be closer to a 47% benefits rate with the entire difference being recognized in the fourth quarter. For 2004 we're assuming about a 15% GAAP tax rate because of the impact of progressively writing back -- writing back on the deferred tax assets that we had to write off last quarter. And because of the relatively low tax rate that we have on most foreign earnings where we don't have DTA's to offset current profits.

Okay, turning to the balance sheet. we had GAAP net income of $13 million. We generated $216 million from -- in networking capital and other so that net cash provided by operations was $229 million during the quarter. Included in that $229 million was $82 million of cash restructuring expenses. In other words, excluding the cash restructuring, we generated $311 million from operations during the quarter.

Capital spending during the quarter was $57 million, $21 million below the level of depreciation. For the year, we had about $205 million in capital spending, over $100 million less than the $311 million of depreciation during the year. For 2004, capital spending should be below $200 million during the year and depreciation should be about $300 million.

Looking at working capital, receivables days sales outstanding was absolutely flat at 58 days. Again, similar to a year ago or the last quarter. For inventories, though, we have an outstanding performance for the first time in the company's history, inventory days on hand is below 100 days, coming in at 95 days for the quarter, compared to 107 days last year, or 106 days just three months ago. Note, inventory is now below a billion dollars.

Okay, turning to the segment data, first test and measurement. Test and measurement had net orders of $645 million during the quarter, down 4% year to year, and up 14% sequentially. Comps test was down about 3% and general purpose test was down about 6%, all versus last year. Turning first to the comps test, which is 70% of test and measurement, again, down 3% year to year, up 17% sequentially.

Overall we saw renewed strength in wireless but continued weakness in wireline markets. We saw increased orders from cell phone manufacturers, especially in Asia. And as a result, our one box tester business grew 16% year-over-year and grew 46% sequentially, the best order performance in two years as demand increased for test solutions for the much more complex cell phones now coming to market. The wireless R&D side also remains strong worldwide while the infrastructure business is still pretty flat. Turning to wireline, we're hopeful that the wireline segment is stabilizing but the fact remains that this business continues to be weak. At our OSS business also continued to be lumpy. As with the equipment market. we experienced year to year and sequential growth for our wireless OSS products but continued to see weakness in our wireline OSS products.

For the 30% of the business that's general purpose tests, we saw orders down 6% year to year and up 7% sequentially. And the main order of weakness in this sub segment was in our services and support businesses, rather than in the products businesses. We saw the normal seasonal strength in aerospace and defense but nothing special. We also continue to make in roads with our high end scope and probe, with the overall scope market share now around 21-22%.

Agilent's market share for logic analysis stabilized at about 53-55%, with order strength in the quarter coming principally from the computer industry. And although the gray market is still active in general products, it's becoming less of a factor in the broad industries where we have released a significant number of new products. So for test and measurement revenues, we had $631 million of revenues during the quarter, down 16% last year, which, again, was boosted by the ERP implementation aftermath. If you adjust for that ERP effect, revenues were off about 8% year-over-year.

More optimistically our book to bill in this segment was 1.02, the first time we've seen it above 1 in quite some time. That compares to 0.9 last year and 0.92 just three month ago.

Our operating loss in the quarter was $11 million. That compares to $107 million one year ago and $69 million last quarter. Looking at it, you can see the cumulative benefits of the aggressive restructuring clearly in our operating results. Compared to last year, our operating loss was reduced by $96 million even though revenues were down $116 million. Sequentially, we had $58 million higher profits on only $18 million higher revenues.

We said in the third quarter that we hoped to get the segment back to profitability in the fourth quarter. We came close but we did not reach profitability because of a weaker than expected service provider market. With the benefit of another quarter's actions, and unless the market declines from here, we would expect the segment to be modestly profitable in the current quarter.

Turning to automated tests, automated tests had another good quarter with the highest quarterly orders since the year 2000 and an attractive bottom line performance for the segment as well. Orders were $260 million in the quarter. They were up 72% from last year and up 4% from the very strong third quarter, with semiconductor equipment orders up fully 90% from last year and electrical manufacturing test orders up 14% from last year. Semiconductor tests had a strong performance from SOC and parametric test ,while flash tests, which had records last quarter, was down due to expected seasonality and the general lumpiness of this business.

During the quarter we had 120 design wins and finished the year with 482 design wins. 276 of those wins are currently in production, driving over 225 SOC systems downstream. Utilization rates for our 93 K SOC systems at Taiwanese contract manufactures continue to be above 95%, and for the second quarter we're continuing to see multiple systems orders. This strength is coming from both our traditional leadership areas of graphics and chip sets as well as from our newer digital consumer and wireless markets.

For manufacturing tests, we saw the third consecutive quarterly increase in orders after a very long and very deep downturn with increases in mobile communications, automotive, PC's, and computing. Here, too, we're beginning to see a little bit less competition from the gray markets. Automated test revenues were $260 million during the quarter, up 18% from last year and 26% sequentially. Our book to bill was a 1.00 compared to 0.69 last year at this time. The segment made $45 million of operating profits during the quarter, compared to $9 million a year ago and $6 million three months ago. Notice that's a 90% incremental performance compared to last year, $36 more profits on $40 million more sales. In fact, the business earned -- or generated a return on invested capital during the quarter of 18%.

Turning to semiconductor products, overall semiconductor products experienced strong, broad-based growth, reflecting the upturn we've seen in the worldwide semiconductor market as well as our success in the mobile phone market and in enterprise storage and networking. Net orders of $493 million were up 36% from last year, with networking one-third of the business up 37%, and personal systems two-thirds of the business, up 35%. Truly strong across the board.

Looking first at personal systems, hard copy ASICs were flat sequentially and down sharply year-over-year. Without hard copy ASICs, personal system orders would have been up 53% year-over-year. Market acceptance of our FBAR filter and EPM power amp continues to ramp as Ned indicated earlier. Currently we're producing more than 2 million filters per month and over one million power amps per month. Our camera module business had 12 new wins with tier 1 phone manufacturers during the quarter and a further four new design wins with tier 2 phone OEM.

In our LED and coupler business, which is almost one third of the personal systems, we're up 11% year-over-year and up 30% sequentially. For networking systems, networking IC orders were very strong, driven by strong growth in storage and networking ASICs and ASSPs. In fiberoptics, we believe we have now taken the number one market position overall, and we saw particularly strong demand for our ethernet products as our [INAUDIBLE] business recovered to normal levels at Q3 inventory corrections and we received orders from new customers for our fiber channel transceivers.

The semiconductors product revenues during the quarter were $463 million, down 2% from last year, but excluding H C -- hard copy ASICs, revenues were up 13%. Our book to bill during the quarter was 1.06 compared to only 0.77 a year ago or 0.94 three months ago. And the business earned $40 million in operating profits during the quarter, double last year on lower volume and compared to an $8 million loss during the prior quarter. This business segment generated a 20% return on invested capital during the quarter.

Finally, Life Sciences. In the fourth quarter, Life Sciences and Chemical Analysis orders and revenues again showed some improvement in the generally flat trend of the prior several quarters. Chemical analysis in particular saw a cyclical rebound while Life Sciences had a more modest advance. Net orders during the quarter were $330 million, up 8% year to year, up 14% sequentially. The strength year to year was in Chemical Analysis, up 12%. Life Sciences year to year was up about 3%.

Looking first at Life Sciences, pharmaceutical spending remained pretty mixed in the quarter because of post-acquisition capacity rationalization and more generally conservative capital spending, and that impacted our sales of LC equipment. The NIH budget release did spur higher spending in [INAUDIBLE] and that helped sales in some of our newer products, such as our iron trap mass spec, and our gene array business. In addition to a cyclical rebound, our chemical analysis business continued to benefit from the infrastructure buildout in Asia for food and water testing, semiconductor production and chemical and petroleum production.

So the segment during the quarter had $321 million of revenue, up 8% year to year, up 6% sequentially. Book to bill, 1.04, signaling continued strength, similar to the 1.03 of a year ago and 0.97 three months ago. Operating profits in the quarter were an all-time record $53 million, up $10 million from a year ago, up $12 million from the prior quarter. This business during the current quarter operated at a return on invested capital of 42%.

Okay. Finally turning to first quarter guidance, Ned gave that guidance. Revenues expectations of 1.55 to $1.65 billion. As we pointed out in the press release, Agilent's business today is about 40% related to consumer electronics, including cell phones. As such, it helps to explain why our fourth quarter revenues were above our expectations and also why we expect a normal first quarter seasonal decline after the holiday selling season. Our pro forma EPS guidance is 5 cents to 15 cents per share. That's based on our $1.45 billion break-even cost structure plus the additional $20 million of IT spending to complete the ERP and CRM implementations.

We'll have more to say about 2004 revenues and profit expectations at our annual New York analyst meeting in two weeks. At this point let me turn it back to Hilliard.

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

Thank you, sir. Today's question-and-answer session will be conducted electronically. To queue up for a question press star 1 on your touch-tone telephone. Once again that is the star key followed by the digit one for questions. Our first question comes from Deane Dray, Goldman Sachs.

Question for Ned. The point about 40% of business coming from consumer electronics, where were we two years ago in terms of the mix, and then where do you expect Agilent to be, because it seems a little bit extreme in terms of exposure to that end market broadly.

Well, Dean, remember, what we're including in that is the cell phone market, and I think historically you've seen numbers that have been far lower because we had put the cell phone market in the communications sector, and we still look at it that way, but I think to get a sense for seasonality, we lumped it into the consumer market. If you look at where we were a couple of years ago, it was probably down below 30%. For a couple of reasons. Number one is, all the new wireless business that FPG is getting for FBAR filters and amplifiers is basically all incremental business business, as well as the embedded camera, which we are just launching in this past year. So all of that is essentially new. Similarly, if you look at the semiconductor test business we're including in that the chips that are tested by our SOC testers. And even flash testers that go into cell phones, like flash memory. So again, given that flash memory has continued to ramp, and given that the digital consumer part of our semiconductor test equipment has ramped, that's a bigger part of the total.

In terms of the test and measurement part, there probably hasn't been a real big change. I think we -- if you include cell phones, we think roughly about 25, 30% of our test and measurement business is somehow related to either digital consumer or cell phones or Wi-Fi or Bluetooth or something, and that number maybe is up a little bit from certainly the downturn of a couple of years ago but that number has not changed as dramatically as probably our semiconductor test and semiconductor product business. And I think we are seeing more of a cyclical rebound in the digital consumer side, which is one of the reasons we've seen more of a bounce in semiconductor products and semiconductor test business, as it's led more by the consumer markets right now.

Okay. That's very helpful. And could -- I've got a question regarding capex and depreciation in terms of outlook for '04, and the broader implications are -- is there any way that your underspending on the capex side versus where you are at depreciation, and is this somehow -- are you making the right investments for new products, and where is R&D in terms -- you said you're comfortable where you are at 13%. If we see revenues ramp up, are you going to hold to an absolute number or should we see that percent slide up?

Let me comment on capex. Remember a lot of the capex investment in the last couple of years has been in software for some of the new ERP and customer support system. That's winding down. Earlier in '00 and '01, we had a lot of start-up costs, facility costs, buying computers to outfit our IT, and we think that we're running now at a more normalized rate. We also, remember, are primarily out of the fab business in our semiconductor products, so we made some investments a couple of years ago to bring up our P-AMP amplifier and FBAR filter capability but we don't expect incrementally a lot of need for new investment there. We believe we have sufficient capacity, at least for this coming year.

So in general, R&D-wise, we believe we're spending capital, what we need to spend, and manufacturing, we believe we have enough capacity, and we would be outsourcing more if we see a bigger ramp, particularly in things like embedded cameras and other areas, we're planning to do more with outsource partners. In terms of R&D as a percentage of revenue, as I said, we believe the 13% range is pretty close to where we want to be. It's going to oscillate around during the cycle. During peak cycles, we'll probably run a little below that level, so that during troughs of cycles we can run a little above that level. So we're running today roughly at the mid-cycle rate. We will be watching that. As I alluded in to my comments and in the press releases, we're going to be balancing the need to make some incremental investments to capture opportunities as they come along here in the next year or two as markets recover, with the need to keep the lid on and not just raise the water in all of our spending areas as business improves. So any incremental investments will be very focused on specific areas where we believe we can get short-term return.

And our next question comes from Richard Chu at SG Cowen.

Yes, hi. Thank you. My question actually is related to the discussion that you just had. Having successfully met your goal on the $1.45 billion break-even number can you describe just a little bit more your approach to cost structure from here? Seems like attainment of targeted longer term margins are really going to be dependent on your willingness to maintain discipline and your statement on SG&A and R&D are at target levels, suggest that they are now going to grow in line, wondering if both Adrian and Ned could expand on that.

Hey, Richard. Yeah, I think that, again, we had focused on the $1.45 billion cost level. We think there is still a little bit of improvement we can do beyond that as we complete the systems implementation and get out some of the frictional costs associated with maintaining multiple systems. We also have as a real strategy increasing the flexibility of the income statement, not only through using more outsource partners, as Ned described, but also things such as more variable pay that enable us to be able to pay well during the upturns but also be able to cut back on pay without tearing the heart out of the place during the next downturn. So we are putting more scalability and flexibility into that. I think you'll see on the SG&A particularly we'll continue to scale down from the 24% level a little bit and will be more modulated, I think, on the R&D investment, as Ned suggested. The main gap we have between our long-term model and where we are today is in gross margins, and there we are continuing to work hard to ensure that we get back up to the targeted 50% that we should be at mid-cycle.

The only additional comment, Richard, is that, remember, we've talked about the need to establish these objectives over the cycle, and where we believe we are today in our expenses is roughly around mid-cycle range. As business recovers, and we see a significant upturn in our orders hopefully over the next couple of years, we've got to be careful we just don't get carried away with expenses, as I think we have in the past, and many others have, and one of the lessons I learned in this last downturn is the time to prepare for the next downturn is during the upturn. So we're going to keep a real tight lid on expenses, which probably means that some of these ratios will drift a little lower, or in terms of operating profit, a little bit higher, at the peak of the cycle so we have ourselves a little bit of buffer on the downturn.

And our next question comes from Edward White with Lehman Brothers. Mr. White, your line is open, please go ahead with your question.

Hello, can you hear me?

Yes, Ed.

Thanks. If you look at the difference between the GAAP numbers and the non-GAAP numbers and how that's going to trend can you talk about what events will affect that going forward? In other words, you know, when are we going to start to get to the point where the non-GAAP -- you know, the GAAP and non-GAAP numbers are in a pretty similar to each other? And I guess that relates to when you finish up all the restructuring charges and things like that. Can you trace through how that might look as we go through the next few quarters?

Sure. We will continue to phase down our level of restructuring, Ed. It's hard to estimate in any particular quarter, but we would expect to have something in the 25 to $50 million more restructuring period over the next, let's say, six to nine months. We will also have $9 million of non-cash intangibles amortization per quarter that will continue to be a discrepancy between GAAP and non-GAAP. But the biggest difference is going to be these deferred tax assets, because remember we had to write off $1.45 billion of deferred tax assets. Now as we get profitable on a GAAP basis, assuming it's in the correct jurisdiction, we'll write back on those lost taxes. So we will appear to have a very, very low tax rate. Again, guidance is roughly 15% on the incremental profits. And that will be the major discrepancy, because we think we should be signaling to you that a 31% pro forma tax rate is more appropriate tax rate for the long term, and some day, you know, the accountants will tell us to write back on all those deferred tax assets, then we'll be back at our 31% tax rate.

Great.

The only additional comment, Ed, is that the restructuring announcements have really already been made, but the timing is such that we need to complete the ERP and the project independence.

CRM.

In the February time frame. That's our CRM program. And so that will wind down in the first quarter, and then we expect to see some additional savings, but all of that has been cranked in and very consistent with what we've told you before as we wind those down we expect to get some additional savings.

Okay. Then finally, you know, more details on the CRM rollout, where does that stand now, you said it will be finished up probably around March, but how is that progressing now?

The only point I'd make is we went live last December, and we did it in a very short period of time. The whole thing from start to finish was essentially nine months. So what we went live with was phase 1, kind of the minimal set of functionality. We just implemented phase 3 in September, and we go live with the final phase, phase 4, in February. And each one of those phases just adds incremental functionality to the system, and, again, we're already up and running. We can just make the system more efficient and effective in its operation.

Okay. Great. Thank you.

We'll take our next question from Paul Coster with J.P. Morgan.

Quick question on, this is really -- this would be a nice problem to have, but if things continue to improve, do you see any capacity constraints or step function investments that need to be made in order to continue ramp-up? Essential how much capacity do you still have?

Well, Paul, I think we have plenty of capacity in our manufacturing operations and as we mentioned, we've done a lot of outsourcing, and part of the selection of our outsourcing partners is that they would have the capacity to be able to ramp fairly quickly on the up side if we need to. So I think from a -- from an internal capacity and from a capacity of partner point of view, I feel very comfortable. I'll tell you, the one thing that worries me, probably, more than anything, is having lived through a number of these other cycles, is getting into some component shortages. Everybody has screwed down their capacity so tight that, you know, I remember one time it was panel capacitors, and another time it was ceramic capacitors, but we just need to watch very carefully that we don't get into a shortage position and things like that. I can assure you we're watching that very carefully and working with our suppliers, but to me that's a bigger risk than internal capacity or capacity with our outsourcing partners.

Okay. One other question, Adrian, I think you mentioned that the IT spend had gone from 40 to $50 million per quarter down to $20 million. First of all, did I understand that correctly, and secondly, does it go to 0, or is it kind of bottoming out now?

Yes, did you understand correctly that we reduced it from the 40 to 50 to 20 running rate, and it will stay there for another quarter or two, then run down to 0. What we've been trying to do with that metric is talk about the exceptional spending related to the major program implementations, and as those are completed that spending goes away.

Yeah, that's obviously not total IT. That's just the incremental cost to bring up these new systems, and we've been trying to break that out for you, so you get some idea of the order of magnitude of how big these investments have been.

And we'll take our next question from Arindam Basu with Morgan Stanley.

Hi, good afternoon, gentlemen.

How Dee.

Could you repeat for me the 93-K SOC wins? I just was writing when you mentioned that.

Sure.

Just for the quarter. I got the full-year number.

120.

Right. Okay.

For the quarter.

And you mentioned hard copy ASICs, and I just had a question about price compression in the hard copy ASICs arena, as well as your market share at your biggest customer in that arena. Could you talk a little bit about year-over-year changes there?

I think there's several things going on in hard copy ASICs. One is, as I said before, in '02 we had an abnormally high market share for a number of different reasons, and our market share we expected would come down in '03. But at the same time, as the price of printers has continued to get lower and lower, obviously there's not a lot of margin left in the silicon piece. And so we have actually walked away from some business because we didn't think that we could compete and make reasonable margins. So we have consciously reduced our share in order to maintain the profitable part of the business that we want to participate in. So I'm not worried about this. I mean, HP is obviously looking -- they need to look for other sources as well, and to find people that are willing to take on that kind of business, but that's not what we want to do. We want to put our investments in areas where we can get higher returns.

And our next question comes from Adjit Pie with Thomas Weisel Partners.

Good afternoon and congratulations on an excellent quarter.

Thank you.

Couple of questions. The first is, how many of your 17 business units were profitable during this quarter?

We don't give out that information.

Okay.

Obviously, a lot of --.

The vast majority, let's put it that way.

Okay. And then the second question would be, in terms of geography, could you give us further color on what you're seeing in Europe and Japan?

Actually, in Japan we are seeing more strength than we expected, or that we have seen, in many quarters. There does appear to be some building of momentum. I'm sure it has something to do with the semiconductor turnaround which is taking place there. The traditional strength in consumer electronics, flat panel displays, all are quite strong, and including 3G by the way. So we are seeing a surge, or at least stronger growth in Japan than we've seen in some time. Europe is more modulated, steadier.

Yeah, I think probably the good news for Q4 is that we saw nice recovery in the Americas. The Americas has really been the weakest area for us, and it was up 20% over Q3, and that's really an encouraging sign. Some of that is aerospace and defense seasonality but a lot of it is the semiconductor industry, semiconductor capital equipment industry, some of the networking and IT companies, so that's good news.

I just returned from a week in Asia, and I think Asia is really looking quite strong. Japan, as Adrian said, the digital consumer markets there are looking up. People are investing in just even over the last couple of weeks there's been announcements of people that are going to build out their 300-millimeter fabs and accelerate some of their capacity expansion, and that is pretty true all over Asia. Remember, a significant portion of our business now, almost 40% of our business, comes out of Asia. That's largely driven by the semiconductor product business as more and more of the contract manufacturers move to Asia, you see a lot of our components being delivered in Asia. That doesn't mean they were necessarily specked in or ordered in Asia, but they were delivered in Asia. So a lot of our business is in Asia these days. And that's looking pretty strong.

Europe, as Adrian said, is kind of lumpy. There's a little bit of good news there, you know, in the wireless area, some of the GPRS and 3G networks are continuing to expand, but overall I think people are still being relatively conservative, and they're less, probably, probably going to participate less on the semiconductor side because there's only, really, two or three major semiconductor companies in Europe, and those will probably grow and do well, but it will be offset by a lot more growth on the Asia side.

And next we'll go to Brett Otis at Merrill Lynch. Mr. Otis, your line is open.

Hi this, is actually Mike Logan for Brett Otis. Just had a couple of questions. The first one was concerning the flash business. You had mentioned that was lumpy, and the question I had was, what do you think the outlook is going to be for that over the next few quarters, and would you see that business headed for a return to growth? Then the second question I had was concerning your utilization rate in the SPG group. I'm wondering where they stand right now and what you see happening with those over the next few quarters.

As far as flash goes, I think if you were to look on a year to year basis, looking from, you know, '03 to '04, we certainly expect there will be growth in the flash business. Exactly what quarter it's going to come in, frankly, it's very difficult to predict. It depends on when the various suppliers decide to increase their capacity and when they do, it usually comes in lumps. So I think you're just going to see that business bounce around from quarter to quarter.

Okay.

But if you run an average through it, it's probably going to be up certainly over the next year and probably over the next several years. As far as the SPG capacity, you know, we're continuing to fill out our capacity in our Fort Collins facility for our FBAR filters and P-AMP amplifiers, but we believe we have sufficient capacity through '04 without having to bring on any additional capacity beyond what we already have.

And we'll take a question from Mark Fitzgerald with Banc of America.

Thanks. When you look at the leverage in the model going forward, is there any change to your targets that you've laid out here in the last couple of quarters?

I would say, Mark, that the only change is we had said 60 to 70% incremental until we get to the $7.5 billion annual volume. As I mentioned earlier, we have now instituted variable pay within Agilent, and what that will do is improve the scalability of the business. Again, flexing up and flexing down. But what that means is that going forward we'll probably be closer to the 60% end than the 70% end, but will also continue beyond the $7 billion, or $7.5 billion rate.

And just a quick product question. Can you give us a sense on the CMOS image sensor market, how big this is, the opportunity going forward, and where you guys fit in that?

Well, again, remember the -- if you look at the broader market, including the navigation chips used in our mouse, you know, that's several hundred million dollars market, and we have a very large share of that. That particular market is maturing. It's not growing at the rapid rate of embedded cameras. The hot market now, of course, is embedded cameras. We're ramping our capability there. That's still, if you looked at the numbers for '03, it's probably not that big of a market, several hundred million dollars, overall market, but the ramp on that is scheduled to be very, very large in '04 and '05 as I think a bigger percentage of the cell phones are shifting over towards embedded cameras. So I don't have a specific number for you here, but, you know, at some point in time we can certainly -- you know, we can certainly talk more about that when we see you in New York at our analyst day.

Our next question comes from Mariza Costa at Wachovia Securities.

This is actually Steve Koffler. Can you guys hear me?

Yes.

Ned, I'm actually en route returning to the U.S. from Asia, and it's pretty obvious over here that things have picked up nicely. I was wondering if I could concentrate on one particular area, which is the cell phone industry. One theme, maybe a counter theme, but something we've seen nonetheless is inventory overhang in the cell phone market and lots of what you might call excess suppliers, kind of looks like a market that needs to consolidate some. And I would think Agilent probably benefited from all the expansion in this area. Do you think that there's a chance the cell phone manufacturer group in Asia needs to consolidate and that this is a negative trend you may feel in, say, the next three, four quarters?

Well, I think it is, but I would distinguish between what I call tier 1, tier 2, and tier 3 players. Tier 1 players I think is where we've seen the bulk of the recovery, and it's really where the bulk of the market is. Tier and even tier 2 players. There's a lot of small companies that got into the market in 2002, particularly in China, that I think will end up having to consolidate or drop out of the market, and, frankly, we haven't seen a real big pickup in the tier 3 market. Again, it's been mostly in the tier 1 and tier 2 markets. In general, though, we are concerned about inventory overhang. I think there's a real question about the post-Christmas outlook for cell phones, and that's why we lumped cell phones into the consumer category, because depending on what the sell-through is over the Christmas holiday, that will determine a lot about what the orders are in January, February, and potentially into March, not unlike other consumer products. So we're going to wait and see, and one of the reasons, frankly, we're not being more bullish on the first quarter is, you know, we're factoring in the fact that we believe there will be a little bit of a bubble there post the Christmas holidays slowdown in ordering but it will regain strength as we go through '03 and '04, but I think there is the risk of an inventory overhang, particularly on the cell phone side.

Operator, in order to keep the call to an hour, we're going to take just one more question at this time.

Yes, and that question will come from Richard Eastman at Robert W. Baird.

A quick question on the operating profit and the break-even point within the test and measurement segment of the business. Do you have a sense of what that would be?

Well, obviously, almost the -- almost by definition the break-even point is about $8 million higher -- excuse me, about $12 million higher revenue than we achieved.

You said obviously from your comment earlier about that piece of the business being profitable, is that a function of where the revenue is expected to come in, or is that a function of just the latent cost reductions rolling through?

What we said is if the business didn't get significantly weaker from here that we ought to be achieve modest profitability, which means we are getting it from cost reductions.

Remember that test and measurement is where the bulk of the remaining IT costs are. We have completed our ERP rollout in SPG, we're substantially done in LSCA, but it's basically the test and measurement part where we see the -- and particularly the not ATG part but the test and measurement part is where we have the work to go to complete the ERP. So the $20 million that Adrian referred to that, you know, we spent this last quarter and will continue to spend even in the first quarter, is predominantly in the test and measurement segment. If you took that out, then we've been profitable even in the fourth quarter. So once that's done and winds down, the business will be profitable. We expect additional savings beyond that as a result of completing these systems, so that's why we have very high confidence that we will get this business back to profitability through what we believe is no restructuring actions now. Beyond that, certainly some help in the top line would help, but we're not banking on that. We believe we'll get profitable with just the actions that we already have underway.

Well, thank you, everyone for joining us. We look forward to seeing you in New York on December 9th when we host our analyst day, and we look forward to speaking with you then. Thanks for joining us.

This does conclude today's conference call. You may disconnect, and we do appreciate your participation.