安捷倫 (A) 2004 Q1 法說會逐字稿

Good day and welcome to the Agilent first quarter 2004 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 Investor Relations Director, Mr. Hilliard Terry. Please go ahead, sir.

Thank you and welcome to Agilent Technologies' first quarter conference call. With the are Agilent's Chairman, President and CEO, Ned 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 a SEC Regulation G, if during this conference call we use any non-GAAP financial measure, you'll find it on our website and the required reconciliation to the most directly comparable GAAP financial measures.

Additionally, I would like to remind you that 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 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 all the factors at work.

Forward-looking statements, including guidance provided during this call today, are only valid as of this day. The Company assumes no obligation to update such statements as we move throughout the quarter.

With that, I will turn it over to Ned.

Thanks Hilliard and welcome everyone.

We're pleased with our first quarter performance. Our revenues and earnings were well ahead of our initial guidance and within the range of our revised guidance. Several of our markets continue to strengthen, with the consumer market more robust than expected. This stronger activity, along with the benefits of our operational transformation, contributed to our bottom-line results. Today I will give highlights of our results, an overview of our markets and an update on operations. Then I will close with guidance.

Orders of $1.73 billion were up 27 percent over a year ago. Revenues of $1.64 billion were up 16 percent compared to last year. GAAP earnings were $71 million or 14 cents per diluted share. Excluding net restructuring and amortization charges, non-GAAP operating net income was $103 million or 21 cents per share.

In our first quarter we achieved a $1.4 billion operating break-even cost structure, three quarters earlier than planned. We are committed to sustaining this cost model.

Now I will comment on our markets. Like most of our customers, we're optimistic, but somewhat cautious about the sustainability of the recovery. Growth in consumer electronics drove orders in several businesses over the last quarter. Semiconductor products demand was strong across all product lines, especially in personal systems. Growth in the cell phones fueled demands for cameras and RF components. Demand for SoC test doubled year-over-year, but declined sequentially from a very strong fourth quarter.

During the first quarter we had 172 design wins, surpassing our previous high of 161 design wins in the third quarter last year. In the first quarter we saw significant activity as the market moved to newer high-speed busses and we won the first PCI express chip, which will go into production by the third quarter.

The IT market is showing some encouraging signs as the consumer-led recovery is expected to spread to the corporate sector as we go through 2004.

In Telecom wireless continued strong. Demand for cell phones and new cellular devices has continued even after the holiday season. And our one box tester business grew year-over-year and sequentially on top of a strong fourth quarter performance. Wireless service providers are continuing to invest in OSS network management systems as they migrate to 2.5 and 3G networks, improve their network quality and roll out new services. We saw signs of stabilization in our wireline test business with new opportunities focused in IP networks, new services and access.

Life sciences and chemical analysis had solid growth year-over-year across all geographies. Our large customers increased their CapEx spending as the economy continued to recover. Also contributing were Asian requirements for food and water testing, and for semiconductor, chemical and petroleum production.

Let me turn out and update on our operational restructuring and transformations.

We were very pleased that a lot of hard work is now behind us. In our current quarter we're completing the last round of implementations of our ERP and customer support systems. Going forward, we're focused on stabilizing and optimizing these new systems and continuing to reap the benefits. All of our initiatives, including the transformation of our IT manufacturing facilities and finance functions, streamlined our cost structure and contributed to our performance for the past two quarters.

Going forward we expect the recovery to continue gradually. Our customers are investing more in CapEx, but selectively and cautiously. As confidence increases in economies around the world, we're well positioned to take advantage of opportunities. We're controlling our expenses, delivering on our commitments for new products, satisfying our customers and reaping the benefits from our transformation investments.

To conclude, we're confirming our guidance for the second quarter. We expect second quarter earnings before restructuring and amortization charges to be in the range of 20 to 25 cents per share on revenue of 1.65 to $1.70 billion. For the full-year we're comfortable with the current range of analyst expectations for revenues and operating earnings per share.

Now I will turn the meeting over to Adrian.

Thank you Ned. Good afternoon everyone. Let me give you a few perspectives on Agilent's overall financial results and review the performance of our business segments.

First, looking at the enterprise level, overall we are pleased with our first quarter results. As in the previous two quarters, we met and even exceeded our performance commitments for the quarter. We think it's notable that at $1.643 billion we just about hit the top end of our original revenue range of 155 to $1.65 billion. But our operating earnings per share, at 21 cents, came in well above the top end of our original 5 to 15 cent guidance. This resulted from our hitting our year-end break-even operating cost target of $1.4 billion in the first quarter, rather than the fourth quarter of this year. And this in turn is a result of continuing restructuring benefits, tight cost controls and somewhat better gross margins.

We also generated positive free cash flow from operations again this quarter, which is normally the weakest quarter of the year for cash flow generation.

At $1.643 billion revenues did come in a bit short of the $1.65 billion average of our revised guidance range of Q1. Like Cisco and several others have mentioned, we saw slightly softer activity in the second half of January than we expected. We believe that is the result of the unusually early Chinese New Year, which fell on January 22nd this year rather than in February as it normally does and for Agilent anyway shut down much of Asia for the remainder of January. And while it's still too early in February to have much confidence, we do believe we're seeing business pick back up again this month.

For the quarter we had net orders of $1.73 billion, up 27 percent from last year and flat with the very strong fourth quarter. Geographically, orders were up in every region, but were particularly strong in Asia-Pacific. We saw an 11 percent increase in the Americas, a 26 percent increase in Europe, but fully a 43 percent increase year-over-year in orders from Asia-Pacific. Revenue at $1.643 billion was up 16 percent from last year and down only 2 percent from the normally strong fourth quarter of last year.

Impact of currency -- currency had little impact on Agilent's first quarter bottom-line results because of our hedging strategy. The year-to-year impact of a declining US dollar was to increase reported revenues by about $49 million or about 3 percent. So adjusting for currency our revenues were up about 13 percent year-over-year. Sequentially the impact of currency on revenues was about 20 million or 1 percent.

During the quarter we achieved a gross margin of 46 percent, up over 7 points from a year ago. Note that we improved our gross margins by two points over the fourth quarter, even though revenues were down two percent, suggesting that pressures in the marketplace have eased a bit. Indeed, while the competitive environment remains really tough, for the third consecutive quarter we did not see any material deterioration in the level of discounts (ph) compared to prior quarters.

Turning to operating expenses, we had R&D spending about $219 million, down 20 percent from last year at this time and flat with the prior quarter and about 13 percent of revenues. SG&A costs at $400 million were down 16 percent from last year at this time, up less than 1 percent from the fourth quarter, and again 24 percent of revenues. Looking at the total change in operating expenses, they're down $131 million year-over-year and up $4 million quarter -to-quarter. Note that both for R&D and SG&A we remained at levels consistent with our long-term operating model at 12 to 13 percent for R&D and less than 25 percent for SG&A respectively. While it looks like we broke our pattern of steadily lower operating expenses in the first quarter, $11 million of the $4 million in higher expenses was due to currency. In other words, had the dollar not dropped, our reported operating expenses would have been down another $7 million sequentially rather than up $4 million.

Tax rate -- our pro forma tax rate for the year is at 31 percent.

Reconciling from operating earnings to GAAP results, we had an operating earnings of $103 million or 21 cents per share. We had $11 million of goodwill and intangible charges, about $45 million of restructuring accruals in the quarter and a tax benefit of $24 million during the quarter, adding to $71 million for the quarter or 14 cents per diluted share. That compares to 3 cents in the prior quarter and a 78 cent loss one year ago.

As we mentioned in the last earnings call, we're assuming about a 15 percent GAAP tax rate this year because of the impact of progressively writing back on the deferred tax assets that we had to write off last year and because of the relatively low tax rate that we have on most foreign earnings where we don't have DTAs to offset current taxes.

Turning now to the balance sheet, we had a GAAP income of $71 million. We've consumed about $31 million of net working capital and other expenses for a net cash provided by operations of $40 million. Subtract out 29 million of CapEx and we have positive free cash flow from operations of $11 million during the quarter.

Now as we have done over the past two years, we advance funded our pension fund contribution for the entire year into the first quarter in order to get the benefit of a full-year of investment return. That was about $78 million in the first quarter of this year. We also had cash restructuring expenses of $37 million in the first quarter of this year. If you just take a normalized rate of pension fund contributions, and then taken out of cash restructuring, we generated $100 million of net free cash flow during the quarter.

Capital spending, as I said before, was $29 million during the quarter or fully $40 million below the level of depreciation in the quarter. Receivables days sales outstanding were stable at 58 days, equal to the fourth quarter to down one day from last year at this time. Inventories at 107 days were fully 15 days better than last year at this time. All in, we had a cash balance of $1.678 billion by the end of this quarter. That was up $71 million from the end of the prior fiscal year. And just to confirm, our 2004 CapEx should be less than $200 million, while depreciation is about 300 million.

Let's turn to segment data, starting with Test and Measurement.

For Test and Measurement were perhaps most pleased that we met our commitment to return this segment to profitability for the first time since the second quarter of 2001. Test and Measurement orders were $642 million during the quarter. They were up eight percent year-to-year. Coms (ph) test, which is 69 percent of the segment, were up 6 percent, and general-purpose test was up 13 percent year-over-year. We saw year-over-year growth across all geographies, especially in Japan with the continued growth of consumer electronics.

Looking at communications test orders for a little bit of color, we continued to benefit from the continued expansion of the Asian wireless handset manufacturing capacity, indeed as Ned mentioned, our one box tester business grew 17 percent year-over-year and was up 16 percent sequentially, driven by the strong demand for the more complex testing solutions required by camera phones, gaming phones and other mixed-mode phones.

Concerns about excess capacity in China seemed to have largely dissipated. That is assuming continued increases in handset volumes that we're seeing. But the inventory bulge seems to have been worked off. We're also seeing signs of increased activity on the wireless R&D side.

Wireline test orders continued to be pretty flat for about the third consecutive quarter, not getting a lot stronger but also not deteriorating here. And the overall impact of the gray market has definitely diminished except for the optical test area.

And overall, the market for general-purpose test instruments continued to show signs of moderate recovery, essentially across the board.

By the way, Test and Measurement was one of two businesses where we saw the impact of the Chinese New Year most specifically, and so we saw much more linearity through the quarter than the usual hockey stick pattern that we would see over the course of the first quarter.

Revenues in Test and Measurement of $642 million were up 1 percent year-to-year; they were up 2 percent sequentially. Book-to-bill was 1.0. During the quarter we had operating profits up $4 million. That compares to a loss of $132 million last year at this time. And you can see the cumulative benefits from our aggressive restructuring clearly in the operating results. Compared to last year, we had $136 million improvement in profits on essentially flat volumes. Even compared to the prior quarter, we had $15 million higher profits and only $11 million higher volumes.

Turning to Automated Test, Automated Test had another good quarter with significant year-to-year growth in all of its business units. Orders did drop sequentially in the first quarter, similar to the pattern of the prior three years, because of seasonally soft consumer oriented demand early in the year. ATG is also one of the segment that we think was most affected by the early Chinese New Year. We continue to expect this will be a big year for ATG, with an increase in activity that's at least as great as that for the semiconductor capital goods industry as a whole.

Orders during the quarter were $200 million. They were up 74 percent from last year at this time and down 23 percent from the always strong fourth quarter. Semiconductor test orders were in fact up 88 percent year-to-year, while manufacturing test orders were up about 31 percent.

Looking at semiconductor test orders for a minute, for the third consecutive quarter customers placed multiple systems orders for our 93K SoC test system. In fact, as Ned mentioned, SoC test orders grew more than 100 percent year-to-year, and utilization of those testers at Taiwanese contract manufacturers remains very high at roughly 93 percent utilization.

Ned mentioned the record level of design wins that we had in the quarter. Those design wins are coming from our traditional leadership areas in graphics and chip sets, as well as from the digital consumer and wireless markets.

We also, for the first time in quite some time, saw very strong year-over-year performance into parametric test, which of course is tied more closely to the front end of the fab and was driven by the Asia fab build-out and 300 mm wafer production investments.

Finally, flash was seasonally weak this quarter, and it is a business that remains very lumpy quarter to quarter.

ATG revenues in the first quarter were $219 million. They were up 61 percent from last year, down 16 percent from the fourth quarter. For the third consecutive quarter ATG was profitable at an operating profit of $20 million or 9.1 percent of sales in the quarter. That's up 68 million from last year at this time. When you look at the profits incrementally, that's an 82 percent incremental profit on the additional $83 million of revenues year-to-year. During the quarter, the group achieved a return on invested capital of about nine percent.

Turning now to Semiconductor Products, overall Semiconductor Products experienced very strong broad-based growth, reflecting the upturn we're seeing in the worldwide semiconductor market, as well as the particular success we're enjoying in the mobile phone market. SPG orders of $582 million were the highest since the year 2000 and they were up 53 percent from last year at this time. Networking grew modestly, about 14 percent year-to-year, and personal systems was up 73 percent from last year at this time. In fact, they were up 33 percent from the always strong fourth quarter of last year.

Looking at personal systems orders, we saw continued strong demand for our mobile phone solutions on the heels of the record industry phone shipments last calendar year. And the current quarter demand is continuing to hold up well in what is normally a seasonally slow calendar Q1, thanks to the strong sell-through of camera phones. In fact, we're seeing a proliferation of our CIF and VGA cameras into new and existing phones, with our orders more than doubling sequentially. Last quarter we had six new VGA camera with nine wins. Beyond that we currently have 18 CIS and VGA camera programs in production. Also, our FBAR orders were strong in the quarter. In fact, they were up 63 percent sequentially. We're also seeing strong adoption of our new infrared transceivers with remote control functionality. And in opto-electronics we saw excellent strength in both LEDs and in optocouplers.

For networking systems, as I mentioned, they were up 14 percent year-to-year. We do continue to see signs of a gradual recovery in the networking business. We saw strong demand for our Ethernet products, particularly in the small form factor pluggable applicable, or SFP gigabit Ethernet business. And our fiber channel transceiver orders were also up 40 percent sequentially.

SPG revenues of $469 million were up 28 percent from last year and were essentially flat with the prior quarter. Book-to-bill at 1.24 is the highest number we've seen since early year 2000. And segment profits clearly benefited from higher volumes, better yields on our new products and the cumulative restructuring we've done in this business. During the quarter we earned $60 million of operating profits for an operating margin of 12.8 percent. You can see the incrementals we earned $108 million more profits than a year ago on $152 million higher volume. Just compared to last quarter, $20 million higher profits and only $6 million higher volume. The ROIC in this business -- return on invested capital -- in this quarter was 28 percent.

Finally, finishing up with Life Sciences and Chemical Analysis, Life Sciences and Chemical Analysis showed signs of improving momentum for the second consecutive quarter, with the cyclical Chemical Analysis business again leading the way. New orders of $307 million were up 15 percent year-to-year and off 8 percent sequentially. Chemical Analysis orders were up 18 percent from last year. Life Sciences orders were up about 10 percent.

In Life Sciences we saw a recovery in spending by a handful of the large pharma customers and a more general recovery by the mid and the and small Life Sciences companies. We saw growth across all geographies, but with the largest increase in Asia.

For Chemical Analysis we saw a robust growth really across the board tied to the economic rebound. Asian infrastructure requirements for food and water testing, semiconductor production, chemical and petroleum production also contributed to year-to-year growth.

LSCA revenues of $313 million were up 13 percent from last year and down only 2 percent from the prior quarter. And operating profits continued to be very attractive in this business. We earned $49 million in operating profits this quarter for an operating margin of 15.7 percent. Compared to last year we had $15 million more profits on $37 million higher volume, for an incremental of 41 percent, which when you consider the way this business has been running is a very attractive incremental. During the quarter it achieved a 32 percent return on invested capital.

Finally, turning to guidance. As Ned suggested, we're going to confirm our prior second quarter guidance of revenues of 1.65 to $1.7 billion and operating earnings per share of 20 to 25 cents. This is about half the revenue and earnings range that we've offered in the past, but with visibility and backlog somewhat improved we have a bit more confidence about the outlook, so we've tightened up the range of our guidance. One could argue that our guidance doesn't fully reflect the normal seasonal increase that we see in the second quarter, and that would be correct. But without having experienced the normal first quarter seasonal drop, we're somewhat cautious about assuming the usual seasonal rise in second quarter activity.

For the full year we're obviously all assuming that the recovery is sustained and that it gains momentum. Given the range of industry forecasts for our markets, we're comfortable with the range of analyst forecasts for both the top and bottom lines for 2004. Whatever the growth of the top line, we commit to achieving a 60 percent operating profit incremental on the higher volume, based on the foundation of a $1.40 billion break-even operating cost structure.

At this point let me turn it back to Hilliard.

Thanks Adrian. Sheila, at this time we are ready for questions.

(OPERATOR INSTRUCTIONS) Steven Koffler, Wachovia Securities.

Quick clarification on Asia, if you could. You gave some numbers -- I believe it was Adrian -- to show that it was quite strong year-over-year; I think you said something like 80 percent year-on-year revenue growth. Is that correct?

No, net orders were up 43 percent year-over-year.

Sorry, I misheard. Then, I think earlier in the presentation you talked about the last two weeks of January having been soft there. I guess you were singling out China because of the early timing of the Chinese New Year. So I guess if you could just tell us what the growth rate is sort of suggesting going into that weaker period, and also maybe give any color on specific product areas or groups that were strong and did they all kind of fall off in unison or was there anything to showed continuing strength. You talked about electronics being strong through January. Some characterization of those different comments would be helpful.

Contacts -- first of all, Asia Pacific was up 43 percent year-over-year. It was very strong. When you look at what we actually achieved in revenues -- it was $1.43 billion in revenue for the first quarter -- that was slightly less than $1.65 billion that is the average of the guidance range that we gave in our revised guidance. Indeed, as Cisco and a few others mentioned, in the second half of January Asia did appear to soften. We think the reason for that is because the Asian New Year, which normally falls in February this year fell in January; in fact, on January 22nd. Because of that business really slowed. Many companies had a full two weeks off. So two businesses in specific were affected by the Chinese New Year being early. The first was our semiconductor capital goods business, which did have weaker activity at the very last week; the other was our test and measurement business. In both of those cases -- and for Agilent in general -- we've seen business begin to pick back up in the first half of February. Again, I don't want to suggest that the trends are so strong or our data is so good that we can stay on a real-time basis that all is better now, but business clearly did pick back up again in the beginning of February. So we're pretty comfortable that we now understand what was the cause of that weakness and that it was temporary.

The only thing I would add it is that as manufacturing has shifted to Asia fully 45 to 50 percent of our business is coming out of Asia. So it's not just China; it's all of Southeast Asia, Taiwan. There is lots of places in Asia that are affected by the New Year shutdown. So we are impacted by that. Historically it's been in the second quarter, but this time it was in the first quarter.

If I could just triangulate one more point with that. You mentioned -- and I had heard as well even in the third week in January -- that generally consumer electronics continued surprisingly strong in January when you would have expected a seasonal fall off. So I'm wondering if you could help us understand through channels in Asia how that worked? I would assume that there was some supply chain that you have that would have seen that phenomenon, but somehow, at least at the end markets, demand did not fall off as would have been expected seasonally.

Actually cell phones, for example, sold very strongly at Christmas. Those phone sales have continued through January if you look at the data. And it's up much stronger than the normal seasonality. So I think in general the post-holiday letdown that we normally see didn't seem to be as prevalent this year as we had seen in previous years. I think that says that the consumer markets continued very strong, even through the January time frame.

Let me elaborate one more time, what we did see, in fact, was the consumer remained strong; what fell off was the capital goods and by definition capital goods are postponable. So they did fall through a little bit in the second half of January. As soon as Asia opened back up for business at the beginning of February that business picked back up. So consumer continued strong throughout; capital goods, a little bit of a fall off and has since picked back up.

Deane Dray, Goldman Sachs.

I'd like to pick up right where you left, Adrian, regarding the second quarter guidance if we could. Just to make sure we understand, the first quarter you did not see that seasonal slowdown, so explain the thinking there on the second quarter guidance. You are not sure since you didn't see the slowdown, you're not that confident about the expected seasonal pick up for the second quarter? Are you being -- is that more of a conservative bent here?

We hope it's being a little conservative. But if you believe it has to do with normal seasonality -- the first quarter down and the second quarter up -- if you don't have the drop, you don't necessarily need to pick back up in order to get back to normal. So it's not just conservatism, but we are being slightly conservative in saying we're not going to bet on normal kind of seasonal increase. We didn't see the normal kind of seasonal liquidation.

I think part of the issue here is that we're actually dealing with a new seasonality. Historically we haven't been as dependent on the consumer markets as we are now. As we said last time, roughly 40 percent of our business somehow related to the consumer market. We are seeing a much stronger first quarter because of the holiday season, and as a result really don't quite know how to read that yet relative to the historic decline that we get in the first quarter and increase in the second quarter.

Then, if we take a look at two particular end markets that have been still to be emerging in terms of returning to some strength, those would be the networking business that, Adrian, you said you were seeing a little bit of a gradual recovery. I'd like to get some color there. And then, what in particular is the outlook on the wireline test if you look at the CapEx of the big carriers?

Let me just comment on wireline test. It is relatively flat. It's not up yet; it's not continuing to decline; it's relatively flat. And we think that there are some opportunities, as we've talked about in the past, in router test in some of the IP applications, some of the access markets. We're still thinking there will be some growth there going forward. But so far it's been pretty flat.

If you look at networking, one point I would make on networking, it's down sequentially 11 percent versus Q4, but Q4 sequentially was up 30 percent over Q3. So part of what we're seeing there is Q4 was very, very strong, and we just think that we just didn't sustain at quite that level. But in general, networking continues to be pretty strong for us. We're getting very positive signs from our networking customers, both in the LAN areas, as well as in some of the storage areas. So overall we feel quite good about our prospects in networking going forward.

Ajit Pai, Thomas Weisel Partners.

Just a couple of questions. One of them is looking at your expense line, the SG&A line, and it actually sequentially went up from October to January. Could you give us some color as to what the additional costs are and going forward through the year how we should be modeling that?

That increase you see there, however small it was -- and my recollection is it was $4 million --

6 million.

Whatever. It was caused entirely by currency that we -- obviously we're hedging our P&L, but that doesn't mean that it doesn't show up in the individual line items. It just adjusts the bottom-line results for that. If you were to adjust for a constant currency you would find that our SG&A was down 2 to $5 million quarter-to-quarter. But I think more generally that we're a very long ways towards completing the restructuring program.

But we're at our $1.4 billion break-even overall. We will have increased expenses as business rises. The question is is that a fixed cost increase or is it a variable cost increase to support the increased business? And we're determined that it is to the largest extent possible going to be a variable cost increase to support the business so we can flex both on the upside and the downside. But we think we have achieved the $1.40 billion break-even. We intend to keep it there. We will see some additional decreases coming from IT as we finally complete this quarter the major IT programs. But if all of our collective revenue forecasts for the remainder of this year come to fruition, we would also expect to see some increase in costs as the year goes by.

I think we do expect to see some additional savings going forward, but we also are expecting some increasing costs. You have FICA kicking in in the US, you have some very modest salary increases, you have a few things like that which will offset those. That net-net is we expect to stay pretty close to the $1.4 billion and pretty close to the current levels of headcount through the rest of the year. But remember, as we have said before, at some point we're going to have to start adding fixed cost again and we've said that point is somewhere around 7.2 to $7.5 billion run rate on annual revenue. At that point in time we may have to increase our fixed costs a little bit. But at least for a while, we still have plenty of room to hold at these levels.

Moving on to your gross margin, you have 46 percent gross margin. That is probably one of the best gross margin rates you've seen in a while, despite a richer product mix from some of your lower gross margin products. Going forward through the year if your revenues continue to rise, do we expect the gross margin within this year to trend upwards?

We do not give specific forecasts for specific line items. But certainly, if we have higher volumes we would expect to be able to spread fixed costs over a higher volume and to get an improved level of discounts in the marketplace. And I think that would translate into a higher gross margin.

Brett Hodess, Merrill Lynch.

Congratulations on getting to the $1.4 billion break-even so quickly. I'm wondering, A, if you could share with us how you got there three-quarters early; and understanding that you're going to try to stay around that level going forward, if you could talk to us about -- in the different segments that you went through in the profitability this quarter, which ones we should be able to see the most leverage out of moving forward as volume picks up?

Let me start and maybe Adrian can jump in here. We've been working really hard for two or three years on cost reduction and we knew there's savings in IT, we knew there's savings in some of our finance and workplace services transformation. And it's very difficult to project exactly when you're going to see all these. We're still to some extent even in IT finishing up the investments. So we've been pretty cautious and conservative about not getting too far ahead of ourselves in committing these savings to early. We talked about expecting to see them some time in the mid to latter part of the year. But we continue to work very hard. People have really worked hard to complete these various transformations. And the good news is we're seeing the benefit. So it's very gratifying, I think, for all of our employees to see the hard work beginning to pay off.

I think in terms of where we're going to see the leverage going forward, you can pretty well gauge that based on the relative performance of the businesses. We're very pleased with where our Life Sciences Chemical Analysis business is. It's pretty close to if not best in class in the industry in profits and growth and ROIC. Our Semiconductor Products business has returned 28 percent ROIC, which is very good for that industry -- good margins, excellent growth. ATG is also doing very well relative to its industry peers. The one area that we have the most leverage going forward is clearly getting our Test and Measurement business back to where it has historically been. And frankly, we're confident we can do that. That's always been one of our strongest businesses. We're very confident that we will get it back. Remember, this was also the business that was hit the hardest by the telecom meltdown, particularly in the optics area. So we have plans, we're making progress, we're pleased to be back to profitability there, but we're not quite where we want to be yet.

I would emphasize again, when we get some volume you will see some very attractive numbers being put up by the Test and Measurement segment.

Adrian, can you share with us what you think the incremental gross or operating margin might be when the volume gets to level that utilization is good in that business?

Better than the Company average. We've targeted for between now and 7.5 billion that we would achieve a 60 percent incremental.

Thank you.

Richard Chu, SG Cowen.

Back on the whole notion of break-even and quarterly cost structures, you're at 1 billion 4 today. I was not sure whether I'm hearing that you're in some ways backing away from 1 billion as a structure goal by the end of this year, having achieved it early, whether you expect to continue to achieve that, or are you suggesting that it will go down further or will go up. Could you clarify that number?

We're not backing away on that goal at all. The only thing we have said is that at some point in time in the future when we get our revenues above 7.2 to 7.5 billion, we probably will have to add some fixed cost for capacity expansion, etc. But we think at least for this year we will continue to hold at that $1.4 billion level.

Do you still think that with IT investments beginning to go behind you that the cost infrastructure will trend downward in the short run? Or is that all going to be offset by some of the other dynamics that you portrayed?

I think what we said is that there certainly will be some additional savings, but we also expect some additional costs. We are doing a very modest salary increase, particularly outside the US. We do have things like FICA and others kicking in. So there's some additional costs which tends to offset some of the savings. So net-net I think you can plan for somewhere around the $1.4 billion range to stay relatively constant through the year.

Do you have number on headcount at the end of Q1?

We're at 28,300.

A clarification on the semiconductor test revenue situation. You had alluded to ERP deployment in December. Was that a factor at all in constraining shipments?

Not at all.

No. In fact, we had a very successful launch of our site in Germany where some of those products are manufactured and had no impact at all on revenue.

In fact, ATG hit its revenue plan very nicely.

Arindam Basu, Morgan Stanley.

Just a couple of questions regarding some more color on some of the product lines. Regarding the hardcopy ASIC market, last quarter you commented on the pricing environment saying that you walked away from some poor margin business and therefore some share. What was that dynamic like this quarter, the January quarter? And what do you anticipate for the April quarter?

As far as the hardcopy ASIC business, our orders were up 11 percent sequentially and they were about flat year-over-year.

To answer your question, we're still walking away from lower margin business. But we also are winning some business. So I think the good news is that we're still a significant player for HB in that business.

So really no changes in aggregate to the share situation, even with the pricing dynamic change?

Again, our share trended down last year compared to probably an abnormally high 2002. We have talked about that. We think going forward we will stay somewhere in the range of where we are. We may even drop a little bit more, depending on what happens in the pricing market. But it's not going to be a dramatic change from the levels we're at.

Regarding the LSCA OSS chemical analysis, you talked about seeing better visibility from the pharma companies. One of your competitors talked about seeing better visibility from the pharma companies. And that's been the hold back on this business in recent quarters. You talked about big and small companies. Do you think that is visibility improving across the board in this particular arena? Or is it particular product areas within those manufacturers and it is too hard to call a bit of a recovery across the board there?

I think it's pretty much across the board. Remember, our chemical analysis business did quite well quarter-to-quarter and year-over-year. And then our life science business has also had very nice growth and that seems to be pretty broad across the pharmaceutical industry, big companies -- all companies.

If you remember a year ago, the NIH had delayed the approval of their budgeting process, and as a result there was kind of a hold on a lot of federal funding. There was a merger of a number of pharmas. So we got off to a slow start a year ago. But this year things seem to be moving a lot better. I think in general, as the overall economy improves the spending patterns of the pharmaceutical companies is also improving.

Mark Fitzgerald, Banc of America Securities.

In the Test and Measurement business, what is going to take that to get it going to top line that you can enjoy the leverage that you talked about? What is the end market drivers here?

I think there's a couple things. First of all, general-purpose test tends to go up and down with the overall electronic industry. When people are hiring engineers, when they're expanding capacity, when they're starting -- when new companies are starting through the venture capital community, that generally means more overall business for us.

The other thing is we do think that over this next year to 15 months we're going to start seeing some additional 3G business kick in on the wireless aside. We do believe that we're going to see some recovery in our wireline business, particularly in some of the IP related markets -- router tester and things like that.

So I think these are in general the kinds of things that will drive the industry. It's kind of the overall water level increasing because the industry is healthier, but also very specific targeted waves of opportunity in wireless and wireline communications.

On the EPR (ph) system, all the final charges are behind you of this quarter and could confirm that or not? What's the leverage in that story going forward in terms of actually applying it to your businesses now?

We've said that we've been spending recently at about a $20 million a quarter excess rate to complete the ERP and it is February, in fact, is the final implementation. So we literally have it behind us by the end of this quarter. And so the second half of the year you should be able to see that incremental $20 million reduction.

As far as getting the real benefits from it, obviously we're beginning to already. You take a look at the inventory patterns that we've demonstrated just over the past year to two years, we've freed up $0.5 billion in inventories by lowering our days on hand from the 130s to the 100 level. We think that is very major. In the longer-term obviously, whether it's B2B electronic business or fundamentally redesigning the manufacturing framework to take advantage of that ERP, those are longer-term but they will also pay off very substantially for us.

Thomas Marsico, Marsico Capital.

I had the question on the incremental margins which has already been answered. Thank you very much.

David Duly, Wells Fargo Securities.

Regarding your semi test order rates, I think they were down -- I think what you said was 20 or 23 percent sequentially. Can you give us an idea as far as your major buckets inside the test business like flash and SoC what the pieces did? That would be most helpful.

I think probably the main dynamic there is that our flash business was very weak. Remember, this happened last year -- in fact, it has happened three years in a row -- that the flash business tends to follow more of the consumer spending pattern. And as a result, it tends to drop off after the seasonal holiday selling season. So I think we will see the flash memory business pick up again, as we did last year. But that was clearly the weakest segment. We did see a little bit of drop off in our SoC test. But remember, some of that had to do with the Chinese New Years in Asia as well.

As far is the SoC business goes, you mentioned about picking up your PCI Express win. Is it a fair characterization to say a lot of the e-customers in the graphics and chipset area are waiting for these new parts to come into the marketplace before they push forward with another round of purchasing? Or is there some other thing going on inside your SoC business that we should be aware of?

We've continued to win in the graphics and chipset area. We continue to get design wins there for next generation parts. I think one of the comments Adrian made is that we have also seen good design wins in the wireless area and some of the computation markets which are new business is for us, if you will -- excuse me -- communication business, which are new business is for us. So I don't think people are holding back on the graphics and chipsets. We continue to win deals.

To be clear -- again, the SoC business, our orders were up more than 100 percent year-to-year. They were off a little bit sequentially, but that's just seasonality in the business. We had an all-time record on design wins, we have an all-time record in devices actually using that activity and we're broadening our participation into the digital consumer and wireless. We're feeling pretty good about it.

Maybe you could give us an update on some of the wins or the progress you've made in picking up business in the handset area. I know I've visited your facility and saw a lot of expansion going on for power amplifiers. I am just wondering if you could kind of let us know how you think you're doing in that area with those products.

We've continued to win new design wins in the wireless components. Our RF filter business had a great sequential increase quarter-to-quarter. We're continuing to see new design wins in both the amplifier, as well as the filter area, and of course the camera area. So we don't give out specific numbers on that, but overall we're doing quite well and we're very happy with the way those businesses are ramping. Plus, we're also seeing our yields improve and our production capacity ramp.

David Zimbalist, Blaylock & Partners.

A couple of quick follow up questions on your Life Sciences and Chemical business. First, can you talk a little bit about any granularity in the Life Sciences piece? Was the growth more focused on the analytical equipment side or on the genomics and proteomics platform? And then in Chemical Analysis business, can you talk a little bit about any changes in terms of product mix there? I guess finally, in a way what I'm trying to get to is return on invested capital there continues to be very strong and I'm wondering if that has more to do with overall product mix or cost controls, or is it leveraging the higher cost segments, the more investment oriented segments, or is it just the significant increase in sales coming from the areas where you have less incremental investment -- the older products, the more analytical equipment, mass spectrometers, etc.

Let me try -- and I won't get all your questions.

As far is the granularity, the analytical side of it was stronger. And in general, the chemical side of the Life Sciences and Chemical Analysis was stronger because it is more cyclically sensitive than the more inherent growth of the Life Sciences side.

I can tell you that the ROIC performance, which is very attractive and has been sustained for quite some time now, is really the result of the portfolio of businesses that we have. When we're able to deconstruct within the segment and look at how we're doing versus our Life Sciences competitors, in Life Sciences we compare very well. When we look at how we're doing in Chemical Analysis businesses to the more pure plays, again we're doing very well. We don't think we're in any sense cross-subsidizing or particularly strong in one side or the other. Both sides of the house are performing very well.

In terms of the incremental change, is one outpacing the other or are they continuing to trade leadership on that front?

It depends on where you are in the cycle. The Life Sciences and Chemical Analysis has been growing a steadier sort of 10 to 12 year-to-year. Last year at this time we were talking about Chemical Analysis being flat as a pancake and now it is up 18 percent, so you can see the effects of the cycle on that business more clearly.

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

Tim Acurry (ph), Deutsche Bank.

This is Patame Anamander (ph) for Tim. I had a couple of questions about semi test. You mentioned that utilization is now north of 90 percent. Can you talk about the pricing environment and if you've seen any of the pricing pressure easing up?

This is a tough business and no, we have not seen any of the pricing pressure ease. It's been tough and it will remain tough. But our testers are averaging about 93 percent utilization, which is why they're being bought in multiple copies today. And we think we will continue to take full advantage of that.

If you had to break out the percentage of your semi test orders in terms of technology versus capacity buys, what would that profile look like?

This is a business that turns itself over every two to three year, and so almost by definition it's all technology buys. I would tell you that the vast majority of the buys you've seen from us over the past two years have in fact been technology buys. We've been on the leading edge of the graphics chips, of the consumer chips. It's not been just to fill up existing capacity. Some of our competitors have recently seen some big increases, but it's of their older equipment. In our case it's very much the leading edge stuff.

At this time there are no further questions in the queue.

Thank you. We appreciate you joining us. We look forward for you to join us in May for our Q2 results. Thanks a lot.

That does conclude today's presentation. We thank you for your participation and you may disconnect at this time.