安捷倫 (A) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to the Agilent second quarter fiscal year 2005 financial results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to the Investor Relations director, Mr. Hilliard Terry. Please go ahead.

Thank you and welcome to Agilent's second quarter conference call. With me are President and CEO, Bill Sullivan, and CFO, Adrian Dillon. After my introductory comments, Bill will give his perspective on the quarter and our actions going forward, then Adrian will review the financials and the performance of each of our businesses. After Adrian's comments we will open the call up to take your questions. In case you haven't had a chance to review our press 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.

In addition, I'd like to remind you that we may make some 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. The forward-looking statements, including guidance, provided during today's call are valid only as of the date of this call. The Company assumes no obligation to update such statements as we move through the quarter.

With that, I will turn it over to Bill.

Thanks, Hilliard, and hello, everyone. I would describe our Q2 results as solid, with our performance just about where we expected it to be. Compared to Q2 of last year, we improved gross margin by almost two points despite lower revenue. We added about $160 million in free cash flow, and total inventories were $79 million, down compared with Q1, and $92 million below Q2 last year. We had good market response to our new products and several businesses. On the downside, weakness in the semiconductor and related markets continued in Q2, and this affected our business that served those markets.

What I'll do today is talk about our Q2 results in the context of how we define the Company, as well as the actions we are taking to achieve our long-term operating model. Agilent is the premier measuring company in the world. We compete in three primary areas: analytical measurements, electronics measurement, and semiconductor components. Our Life Sciences and Chemical Analysis business addresses the market for analytical measurement. LSCA had a solid Q2 with good results in orders and ROIC when compared with last year. In Life Science, large pharmaceutical customers are investing in our tools and solutions to support their development processes and data management. In addition, investment by genetic -- or generic drug manufacturers are creating demand for our development and manufacturing solutions in India, China, and Korea. In Chemical Analysis our installed base in forensics, chemical firms, government agencies, and other markets drove good demand in Q2.

The second market we addressed is electronics measurement, which includes our Test and Measurement and Automated Test segments. Orders and revenues in Test and Measurement improved over Q 1 in the same quarter last year. There was some recovery in stabilization demand for wireless test solutions. In addition, our new family of oscilloscopes is getting very strong acceptance with customers in the R&D space. The strength in Test and Measurement was offset by continued weakness in the Semiconductor Test business. However, we believe we have passed the cyclical trough as system on a chip test posted it's third consecutive quarter of sequential growth. Several push-outs of orders affected our revenue in Q2, and excess capacity continues to drive intense pricing pressure in Semiconductor Test. We have completed major product transition in this business. Our new products are gaining traction with integrated device manufacturers.

The third part of our business is semiconductor components. Given the different dynamics in the non-test business, good sequential order growth in Q2 was driven by fiber optic components, our laser mouse, optic couplers, and motion control products. Seasonal softness in wireless handset market following the holiday season and Chinese New Year led to lower demand for mobile device components. However, it appears that the industry's inventory related adjustment to semiconductor production has been largely completed.

So to sum up, our Q2 results were driven by strength in our Analytical and parts of our Electronics Measurement markets. This strength was offset by weakness in the semiconductor related piece of electronics market and semiconductor components business. Looking ahead to Q3, our guidance is for revenue between 1.7 and $1.8 billion. We expect to get some help on revenues from the start of a modest rebound in our semiconductor and related businesses. We also expect this help to offset somewhat by our normal seasonal weakness in Q3. Our guidance for operating earnings in Q3 is between $0.23 and $.28 per share with more typical seasonal strength anticipated in Q4.

Our Q2 results show that we are not achieving our long-term operating model, which are for the enterprise to achieve 14% operating margin and 21% return on invested capital through the business cycle. We would love to have better tailwind in our markets, but we are taking steps in all our businesses to move us towards our goals. In the Analytical Measurement space, we recently acquired two companies: Silicon Genetics and Computation Biology. They are building our presence in life science informatics and gene regulation research. We're making further investments in R&D and new product development to expand our offerings and to capitalize on growth opportunities in this high-return business.

We are also making structural and operational changes to address market challenges in our semiconductor tests and semiconductor components. We are combining our flash memory and SOC organization to achieve greater efficiencies; this will also enable us to capitalize in market opportunities in end-user applications at the intersection of memory and SOC tests. In addition, we moved the product charter of our manufacturing test business to Asia. In semiconductor components, we continue to reduce our footprint by closing an R&D site in United Kingdom; we're also moving our navigation business to Asia in order to be closer to the customers, improve our flexibility and cost structure.

As you can see, we're taking actions across our semiconductor related businesses to move to lower cost regions, reduce our footprint, and achieve greater efficiencies. All these efforts reflect our basic strategy. We will continue to invest in our high-return businesses in order to leverage our technology and market strength. At this time, we will take steps to make sure we have the right products and cost structures to succeed in a soft semiconductor market. Thanks very much for being on the call. Now, I'll turn it over to Adrian.

Thank you, Bill. Good afternoon, everybody. Let me give you a few overall perspectives on the quarter for Agilent, review the performance of our business segments, and conclude with some thoughts about second-half guidance. As Bill suggested, Agilent had a solid second quarter performance and one that from an operating perspective was quite consistent with our expectations. Semiconductor related market remained weak but began to show some signs of turn around. Test and Measurement markets also seemed to stabilize, and Life Sciences and Chemical Analysis, after a slow start, had very strong April. We are pleased about our operating performance given the challenging market environment, with gross margins up two points from last year and operating expenses, adjusted for the normal second quarter seasonality, under pretty good control. Our working capital ratios continued to improve, and as a result we were cash flow positive again this quarter generating $163 million of free cash flow and ending the quarter with nearly $2.7 billion in cash on hand.

So turning to the overall numbers, we had net orders in the second quarter of $1.73 billion, 9% below the peak of one year ago but up 7.5% sequentially. Continuing the trend of the prior two quarters, orders were off year-to-year in the Americas and Asia and were about flat in Europe after adjusting for currency. Revenue of $1.69 billion dollars was off 8% from last year, or $143 million, and up 2% sequentially. Currency was worth about $16 million, so on a constant currency basis, our revenues were off about 9% from last year. Our book-to-bill at 1.02 compares to 1.03 last year and up from .97 three months ago. Gross margins of 46.8% were two points better than last year despite 8% lower revenues, with Test and Measurement margins up over five points and LSCA margins up over three points, but also with Automated Test margins down nine points and Semiconductor margins off more than five points from one year ago due to weak volumes and intense competitive pressures in the semi-related markets.

Operating expenses were up slightly year-to-year, and sequentially we saw the normal seasonal increase related to the timing of wage increase, vacation true-ups, and the normal seasonal increase in spending. Because we did not take second quarter spending down as fast as revenues dropped, our operating expenses did remain above our mid-cycle operating targets. R&D in the quarter was $246 million, or 14.5% of revenues, up about just under 4% from last year at this time, or about $9 million.

Currency was $3 million of that nine, or up about 3% year-to-year, currency adjusted. SG&A costs of $441 million were 26% of revenues, up only 1% from last year, or $6 million of which currency was virtually all of that. So adding them together, we have total operating expenses of $687 million, up $15 million, of which half was currency. Currency adjusted to spending was up only 1% year-to-year. That gives us operating profits during the quarter of $103 million, or 6.1% of revenues. That's $46 million lower than last year on $143 million lower revenues, for a decremental performance of only 32%, which we think is very good performance given the markets that we're in.

During the quarter we had $26 million of other income and made a slight downward adjustment to 23% in our full-year tax rate, in which by the way did not have any impact on our second quarter earnings per share. Pro forma net income was $101 million, or $0.20 per share, compared to $119 million, or $0.24 per share a year ago. We had about $3 million of intangibles below the line, about $3 million in restructuring, getting us to about a GAAP net income of $95 million, or $0.19 per share, compared to $0.21 one year ago.

Turning now to cash and the balance sheet, and as we just mentioned I had a GAAP income of $95 million in the quarter and we generated $110 million in cash from networking capital. So net cash provided by operations was $205 million; subtract out $42 million for CapEx and we had free cash flow from operations of $163 million. Depreciation during the quarter was about $56 million. Receivables during the quarter were flat, were actually three days better than last year at 51 days sales outstanding. Inventory on hand was 97 days this quarter. In total, we finished the quarter with $2.7 billion of cash on hand. By the way, we are still comfortable with our full-year capital spending forecast of about $160 million, and we currently expect depreciation to be about $250 million.

Okay. Turning to the segments, turning first to Life Sciences and Chemical Analysis, we saw more volatility in orders than we've come to expect from the steady trend of recent years. The quarter started weak but finished with a very strong April, and overall strong -- finished with a lot of momentum. Net orders of $385 million were up 14% from last year and up 8% sequentially. Orders for our Life Sciences products at $171 million, about 44% of the segment total, were up 17% year-over-year and 13% sequentially. We are seeing very good growth from large pharma customers in our tools and solutions business to help improve their development processes and their data management. India, Korea, and China are seeing continued investment in their generic pharmaceutical industries, as well as plant expansion and the movement of plants by global pharma companies, which continue to drive demand for our Life Science products in Asia. We're also gaining traction in proteomics with our high-end LCMS, the trap XCT with nano LC in our new software offerings.

In Chemical Analysis we had orders of $214 million, up 11% year-to-year and up 4% sequentially. Our large installed base in forensics, chemical firms, petrochemical firms, academic institutions and government continues to drive our Analytical solutions business in Europe and in the Americas, while regulatory initiatives with Asian governments continue to drive demand for test equipment for food, air, and water quality. In Eastern Europe and the Middle East, we're seeing strong demand from hydrocarbon processing customers. LSCA revenues during the quarter were $344 million, up only 3% from last year. Revenue growth slowed sharply in the second quarter from the recent trend because the surge in orders that we saw came very late in the quarter and we couldn't turn those orders around into revenues in the same quarter.

We expect to return to a double-digit pace of revenues in this year's second half. Our book-to-bill at 1.12 is the highest number we've seen this decade. Operating profits at $39 million was up $2 million from last year at this time, and operating margin of 11.3%, which was 20 basis points above last year as we reinvested the higher gross profits into additional investments, including the $3 million impact on operating expenses of the acquisitions we've made over the past year. Sustained profitability and excellent capital management enabled this segment to achieve a 22% return on invested capital during the seasonally weak quarter, up fully seven points from last year.

Turning now to Test and Measurement, second quarter Test and Measurement orders of $757 million were up 2% year-over-year and up 16% sequentially. Overall demand in the Test and Measurement segment was characterized by strong growth in the Americas, normal seasonal growth in the wireless business, and relative softness in our aerospace and defense business. Communications test orders, which represent about 70% of Test and Measurement, were $531 million, up 2% year-over-year and up 17% sequentially. Wireless orders themselves were flat year-over-year when compared to a strong first half last year, but they jumped 18% from the first quarter, reflecting a seasonal increase in demand for our wireless test solutions as our customers prepare for holiday manufacturing ramps. Going forward we expect demand to be pretty flat until later on in the fourth quarter.

In R&D test solutions, on the other hand, which are about 25% of the wireless business, we see continued steady and strong growth. Wireless infrastructure remains a mixed picture, however, with 3G rollout underway but service providers only cautiously investing in network upgrades and expansions. Orders for our wireline test solutions were up 27% year-over-year and were up 13% sequentially, a big change from the direction of the past four years. The underlying end markets remain mixed, but we believe we gained share with our new router testing solutions. We're also well positioned to take advantage of the significant test opportunities in broadband access such as voice, video, and data service, and converged, next generation IP networks. General purpose test orders of $226 million were up 4% year-over-year and up about 14% sequentially, reflecting a pick-up after a seasonally soft Q1. Year-over-year growth was more modest as a result of flat spending in the aerospace and defense business.

In the Logic Analysis and Scopes business, we saw demand increase 34% year-over-year and saw it increase 18% sequentially. These are well above our estimates of the growth of these segments and indicate a significant share gain. For Logic Analyzers, growth was particularly strong within our major accounts. Our new ultra low-cost oscilloscope has been well received and couples well with our high-end and mid-range scopes. Total Test and Measurement revenue of $748 in the quarter was up $48 million, or 7% from last year. The year-to-year comp -- the book-to-bill was about 1.01 versus .93 three months ago.

Operating profits at $72 million were fully $60 million above last year on only a $48 million increase in revenues. The year-to-year comparison of profitability still shows the cumulative benefits of the restructuring program in this segment. The nearly 10% operating margin is up 8 points from last year and a half point higher than Q1, despite the seasonally higher spending. Return on invested capital was 15% in the second quarter, up 14 points from last year due to better profits and asset management and improved by three points from Q1.

Turning now to Automated Tests, Automated Tests had another difficult quarter, although there were increasing signs that we're in the early days of a new recovery. Net orders were $171 million in the quarter, down 40% from last year's peak level, but up 7% sequentially. Semiconductor test orders were $133 million, down 45% from last year's peak and up 3% sequentially, continuing to indicate weakness in the semiconductor test space. However, we are confident that we have passed the cyclical trough as SOC tests posted its third consecutive quarter of sequential growth.

Parametric tests experienced a downturn in the quarter after coming off of all-time highs, and flash memory is still struggling in what continues to be a very difficult environment. SOC orders were down 54% year-to-year but were up 23%, sequentially, representing the third consecutive quarter of growth. SOC orders are now up 58% from the third quarter of last year's trough. Lower wafer outputs at major foundries and weakness at some of our [fabless] customers in the wireless space led to a decline in our utilization rates at SCMs from 92% in our first quarter to 85% this quarter; thus, while market indicators continue to point to a second half uptick, we continue to believe it will be a slow rebound as the industry works off excess test capacity.

Agilent continues to gain single platform momentum with the 93K tester, evidenced by the adoption of our new pin scale systems launched three months ago. By the end of this next quarter, we expect that pin scale will be installed in each of the top ten IDMs worldwide. Flash Memory Test orders were very weak, despite good acceptance of our V-5400 platform, down 83% year-to-year and down 45%, sequentially, as major customers continue to digest overcapacity. As Bill mentioned, we are combining SOC and Flash Memory Tests in order to better achieve better efficiencies and synergies between these two businesses. Automated Test revenues in the second quarter were $181 million, off a third from last year at this time and up 17% sequentially.

The operating loss this quarter was $20 million, down $55 million from last year's excellent performance, but $14 million improved from the first quarter. While still far below where we need it to be, the business did show a good incremental from the first quarter on a modest increase in volume and despite seasonally higher operating expenses. With our new generation of SOC, flash, and manufacturing test products now in the marketplace, the leverage on any further improvement in volumes should be very substantial.

Finally, turning to semiconductor products, please note that all of the comparisons of financial performance for semiconductor exclude the camera business that we divested at the end of the last quarter. New orders were $464 million, up 5% year-to-year and up 22% sequentially. Personal Systems orders, about two-thirds of semiconductor products, were $312 million, up 2% year-to-year and up about 25% sequentially. Most components related to handsets were weak. [F-bar] orders, for example, were down 58% year-to-year and down to about 48%, sequentially, whereas [EP-hempt] orders were up 33% year-to-year, but down 13% sequentially, as handset manufacturers finished flushing their inventory channel. Similarly, LED orders were down 29% from last year for the same reason.

Optical mouse orders, on the other hand, were up 28% year-over-year and up 35% sequentially as we adjusted prices to meet market demand. Our laser mouse solution demonstrated clear differentiation in the marketplace, as we saw strong demand in the gaming segment due to enhanced sensitivities. On a networking side, about one-third of SPG orders were about $152 million, up 11% year-over-year and 17% sequentially. Fiberoptics orders were up 12% year-over-year demonstrating our recovery from quality issues experienced in the third and the fourth quarter of last year. Specific strength came in parallel optics and ethernet, driven by higher consumer demand and growth in fiber to the subscriber. Overall ASIC orders also performed well, up 11% year-over-year and 3% sequentially from a healthy Q1, driven primarily by the strength in our storage business.

Semiconductor revenues in the quarter were $414 million, down 9% from last year at this time. The book-to-bill ratio of 1.12, compared to 1.0 in the first quarter and .97 last year, suggests confidence that the inventory related adjustment to semiconductor production has been largely completed. Operating profits were $12 million in the quarter, down $38 million from last year's very strong performance, and down $3 million from the first quarter, despite $33 million higher revenues. Second quarter profitability was disappointing given the increase in volume.

We had a significant shift in mix to lower margin products during the quarter, and we made no material reduction in the $12 million of residual costs that resulted from our camera module divestiture during the prior quarter. As Bill mentioned earlier, we are now taking steps to fundamentally improve semiconductors' profitability, including shutting a site in the U.K. and moving our navigation business to Asia. We still anticipate absorbing or eliminating that $12 million of residual costs by the end of this fiscal year.

Finally, turning to second half guidance, in the press release we've provided third quarter guidance for revenues of $1.7 to $1.8 billion with the beginning of a modest rebound in semiconductor-related businesses offsetting the Company's normally weak third quarter seasonality. Operating earnings are expected to be in the range of $0.23 to $0.28 per share. We also provided guidance for the fourth quarter because our normal seasonality has been obscured in recent years by the cyclicality in our semiconductor-related markets. Assuming normal cyclical -- seasonality this year, we should see about a 5% increase in revenues compared to Q3. Given the leverage in our operating model and a determination to keep down expenses, this should translate into, roughly, a $0.10 increase in Q4 earnings compared to Q3.

With that let me turn it back to Hilliard.

Thanks, Adrian. Millicent, if you could give directions for the Q-and-A now.

[OPERATOR INSTRUCTIONS]. Our first question today will come from John Harmon, Needham & Company.

Hi. Good afternoon. Can you hear me?

Yes, we can.

Oh. Okay. Good. Just a couple questions. One, if you could talk about your oscilloscope business a bit, I was wondering if the new products you introduced caused a gap in revenues while customers are waiting for the new products to come out, and then just talk about the level of acceptance of the new scopes, please.

As Adrian had mentioned, the acceptance of our new scopes has been very, very good. We've been quite leased with the sequential growth as well as year-over-year growth, and we've also entered the low-end oscilloscope market and the initial feedback has been quite favorable. So there has been no short-term disruption based on the numbers that we reported this quarter.

Thank you. And secondly you were talking about some softness in sales to the aerospace and defense segment. Is that due to the current budget discussions or the government temporarily diverting resources to Iraq or some other cause, please?

Your speculation is as good as ours, but that's exactly what we're speculating, is that there has been recurring budget discussions and diversion of resources to munitions as part of the Iraq war continuing efforts. We've seen a lot more volatility in that business than we traditionally expect, and that is our speculation.

Okay. Thank you.

And our next question comes from Paul Coster with JP Morgan.

You've talked previously about there being too many players in the automated test equipment space and that you're sort of evaluating different ways of addressing that overcapacity. Can you give us your latest thinking? Then I have one follow-up.

well, as we had just noted, we have combined our two organizations to ensure that we have a more efficient organization. One is, we believe, able to address a segment of the market that overlaps our SOC and memory business. In addition to that, we have moved our product charter responsibility for manufacturing test to Asia to be closer to the companies. Continues to be a difficult market, but we're quite pleased with the three-quarters of sequential growth in our SOC business. I'm sorry, just a follow-up on that point. What is the trade-off? Presumably they were separate for a reason previously.

Part of that is history. Our flash test business was originally an acquisition, and as that market was young, and growing rapidly in a different part of the country, it was easier to keep it separate and focused. Now, as all of these businesses are maturing and integrating, technologically, it makes a lot more sense for us. We begin to see some of the synergies between those two platforms and are combined to take full advantage of that.

Okay, fair enough. And my second question, I think you get this every quarter, Adrian, but obviously a huge cash balance now. You're generating cash, hand over fist. What are the latest plans for the use of that cash?

I would tell you that we and the Board are evaluating the alternative uses of cash. It is a the subject of active discussion as we speak.

And as I've mentioned before, we've had three priorities: one, to invest in the business; secondly, to bay back stock or retire our convert; or third one, to pay a dividend. And as Adrian said, we will review those recommendations with the Board and make the announcement appropriately.

Okay. Great Thank you.

Our next question comes from Ajit Pai with Thomas Weisel Partners.

Good afternoon, gentlemen, and congratulations on a solid quarter.

Thank you, Ajit.

Couple of quick questions. The first one would be when you look at your semiconductor product group, could you give us some indication, on the camera module side, what the business that you got rid of last year in April, what it would have comprised of the total?

We think about $46 million, Ajit, but you can see that by looking at the historical data. We did give a reconciliation of the historical data in the first quarter.

Okay. The second question would be on the Life Sciences and Chemical Analysis side. Of the $344 million that you recorded as revenues, how much of that came from acquisitions over the last three or four -- three-quarters?

Very little. Less than 5 million. These are really investments in the future, in future capabilities.

Okay. And then lastly on the Test and Measurement side, you saw some strength, I think much greater strength led to a number of your peers in the industry. Could you give us some color as to the geographies from where that strength is coming? For example in the communication desk side both in wireline and wireless, sort of the geographic pattern of where you are seeing some of that strength?

We've seen fairly balanced strength. It's been flat for such a long time in Europe, we haven't seen much difference either way. We saw a lot of weakness, particularly in manufacturing handset tests, over the prior nine months. That has now flattened out and is beginning to improve a little bit, and strength in the Americas has been pretty consistent and, frankly, a little bit surprising.

In addition to that, as we had mentioned last quarter, there was a fair amount of softness in handset tests in Asia and, clearly, the quarter was better than Q1. In addition to that, this organization has had an enormous amount of restructuring over the last two years, and I think now that we're back to solid profitability, the organization is really focused on the customer in the market and we just after great product lineup across all segments of the sector.

And our next question will come from Edward White with Lehman Brothers.

Hi. I was wondering if you could talk a little bit more about the operating profits in Life Science, Chemical Analysis? Although it was up year-to- year, it was down sequentially. Was that mainly because of the revenues or product mix, or just the timing of when the revenues came in the quarter?

No, Ed, none of the above. This business, more than any other, has a sequential increase in spending in the second quarter. That tends to be the high peak for trade shows as well as the normal increases in salaries, FTO, vacation accruals and all of that. It really is -- if you go back and you look, historically, we've struggled to get into double-digit operating margins in the second quarter. We did that easily this time. And again, just to remind you that expenses were about $3 million higher than last year because of those small acquisitions.

Okay.

Really, if you looked at it year-to-year and you adjusted for that, we actually had about a 40% incremental margin, which we think is pretty good.

Okay. And so then normally in the second half of the year, that tends to snap back and so it's pretty much just a second quarter phenomenon that tends to happen?

Correct.

And then on the semiconductor product side, what -- can you talk about the CMOS image sensor trends? Because it seems to be an area where more and more people want to try to get into the market. Do you see any of that and can you talk a little about your exposure there?

Well we've exited the final assembly of cameras in this market. We do continue to sell sensors to various manufacturers of embedded cameras. In terms of sensors used in our laser mouse, again, we've a very strong patent position and the acceptance of our laser mouse, which, again, is a continued migration of added performance has been very, very strong.

So as you look at it, do you anticipate any competitive pressures in either of those two parts of the image sensor market? In other words, do you have more protection, perhaps, in the laser mouse area than in the camera area, and what are your thoughts on that? The reason I ask is because we hear more about some of the DRAM manufacturers wanting to shift capacity there.

Clearly, on the embedded camera our contribution is focused on the imaging capability that we have from our historical roots from HP, and we will play that very closely with key partners in this space. In terms of the optical mouse or laser mouse, we have a very strong position in Europe and North America. Obviously some issues in parts of Asia, but we believe that we have a very strong patent position on the laser mouse.

And we'll go next to Brett Hodess with Merrill Lynch.

I just wanted to re-check, on the operating expense increase, sequentially, Adrian, did you say half of that was currency affected and the rest sounds more like seasonal issues relative to Life Sciences that you've already explained?

That's correct.

So as we move forward from here on a currency equal basis, are you expecting that you will be taking up operating expenses down further to get back to your model over the next few quarters, and are there specific actions that will be focused on that?

Yes. We're going to have -- we do have an absolutely ruthless focus on expenses and I think you will -- obviously, what will happen to expenses will depend on the level of business, because as we have higher orders, for example, we're going to have higher compensation expense for the sales folks. But I would expect, based on our general perspective, that it's going to be flat to down in operating expenses for the remainder of this year, and that would be consistent with the performance that we had last year.

Very good. Thank you.

We'll go next to Deane Drey with Goldman Sachs.

Thank you. Good afternoon. Within automated test group, did you say how much you saw in any de-booking or push-outs?

We didn't have any material amounts in de-booking or push-outs this quarter.

And then, interestingly, you all were doing some internal consolidation within that sector. Be interested in hearing what you might expect in terms of industry consolidation, especially with SOC and perhaps some excess capacity.

We don't speculate on industry consolidation.

Well, do you feel as though there's excess capacity where we are in the cycle, or is that something that is more short-term?

There's clearly excess test capacity right now in the industry, and as we had said, it's a very, very competitive market and there's a lot of pressure on margins. As Adrian outlined, though, the acceptance of our new platforms has been very, very strong, and, again, we believe that we've hit the trough and that the second half of the year you'll see a modest recovery.

Even with utilization levels dipping down? Is that a material change in your view?

No, Dean. That's -- obviously it's a little bit disappointing but a lot of it is seasonality. Our second quarter is at least to everybody else's half first quarter, where you do have the seasonal weakness after the Christmas season. So we would expect, just seasonally, to see a rebound in utilization rates in our third quarter, and that should feed into higher continued orders.

Good. And what was the contribution from [Lumilabs] in the quarter?

About $8 million.

And then could you size what the China pirating on the optical mouse, could you size for us what that might be doing in terms of margins, or SPG? Is it material?

It's hard to say. I mean, obviously, it's not helping margins.

It's more the impact on the top line. I don't know exactly -- exactly how much revenue that we have lost as a result of pirating in China.

But you were able to adjust your price lower this quarter to -- and you saw a volume pick up there?

Correct.

What were the -- how much above pricing session, and what was the increase in volume?

Don't have that data, Dean.

And also, we also, of course, introduced our laser mouse, which is playing to a higher end part of the market. And that's also, as I had said, has been very, very well accepted in the marketplace.

Okay. Thank you.

And we'll go next to Richard Chu with SG Cowen.

Thank you. A few quick things. You sound clearly more positive on wireline communications test. Can you give us a little bit more color on difference in demand that you're seeing between operators, equipment manufacturers, and enterprise, update on OSS, and give us a sense of sustainability in what you are seeing there? And I have a couple of follow-ups.

Okay. Richard, a few things there, and I won't get them all, but our OSS orders have been volatile, but they were the second highest level we've seen in the last two years. And it was driven by several large orders from wireless service providers. We do expect that momentum to continue, and as Bill said, we expect that to be a profitable part of the business in the second half of this year.

Any difference between the operators and network equipment manufacturers as a source of demand for your wireline testing?

Well, our demand is mostly from the service providers at the OSS level.

No, not just OSS, but the --

Our router test platform -- we introduced last year a new router test platform, and it's been very well recepted at the hardware manufacturers that provide the routers for this market space.

Part of it is that we're taking opportunity, as I mentioned in the earlier comments, of the voice/video/data services, as well as the converged, next-generation IP networks. We're playing very much into those areas.

Want to go back to the questions that were asked with regard to relative strength of [T&M], general purpose. Can you comment on whether this was a pattern that was -- continued through -- accelerated in April? You alluded to that kind of a pattern in the LSCA area. Was that the case in general purpose tests or any linearity issues there?

We are entirely too nonlinear. We always have a surge in orders in the third month, especially at the end of the second and the fourth quarters because that's when our compensation periods end. And so were were pleasantly surprised, really, across the board, at the level of orders, including in general purpose.

And I know, Bill, you said that your new scope orders were up sequentially, but I wondered if you were to look at the entire category of scopes and logic analyzers, would that show growth Q2 over Q1?

Yes, it did, Richard, very substantial growth. In fact, the numbers that I quoted were for the entire category. That was 34% year-to-year and up% sequentially.

Okay. And then finally, in providing Q4 guidance, I wonder if you can give us some context on what kind of operational improvement you assume takes place in the Test and Measurement business relative to your normalized goals and kind of leverage that may or may not be there? How dependent on that is -- how dependent is the -- is your Q4 guidance on a Test and Measurement execution?

Absolutely, given that the Test and Measurement is the most profitable, in absolute dollars, than any other group in the company. But you could combine, seasonally, it's the highest revenue quarter of the year. As Adrian said, is that we've made the changes in terms of reorganization that I spoke about, as well as continued control on expenses, a combination of higher revenue with well-controlled expenses,and the organizational changes we have made, we expect a seasonally higher earnings per share in Q4.

And Dick, again, we do in that business have a quite a substantial fourth quarter seasonality because there is quite a bit of government business, and, of course, that's the end of the government's fiscal year, so there's always a surge in orders at that period of time.

Adrian, in answer to one question from Deane, I think, you talked about expenses being down in the second half. Are you talking about year-over-year or sequentially?

I was talking about sequentially, and I was talking about it being flat or down, depending on the level of business, on the level of orders.

Do you think Q3 will be farther down from Q3 in Q4 maybe farther down from Q3?

Not going there, Dick.

That's enough detail for now, Richard.

Thank you.

And our next question comes from Mark Fitzgerald, Banc of America Securities.

I was curious if you had done any buybacks of stock and if you could give us some idea of the dollar value if you did?

Zero. We do not have authority from the Board to do a buyback at this time.

Okay. And the tax, can you give us some guidance on taxes, here, going forward, particularly as we go into 2006? Are we going to still be running this 20, 25% tax rate?

Yes, we believe so. We believe the 23% is our best current guess at what the long-term pro forma tax rate is. Again, I would remind everybody that our GAAP tax rate is actually less than our pro forma tax rate because for every for every dollar that we make in the U.S. and the U.K., for example, we have a dollar of offset on those previously written off deferred tax assets. So our GAAP tax rate is around 19% at the moment, is our best guess for the full year.

Okay. And when you look out and gave guidance on the fourth quarter, here, is that -- is there any base of this based on forecasts from your sales people or is this just your seasonality swag at it?

Both.

Thank you.

[OPERATOR INSTRUCTIONS]. We'll take our next question from Richard Eastman, Robert W. Baird Investment.

Hi. Just one quick follow-up. On the ATG business we had talked about a break-even in the 205 to 210 million range, quarterly range. With the pricing dynamics there offset by some of the cost reduction efforts, do you have a new sense of where the break-even would be?

We would -- again, it will depend on the viciousness of competition going forward, but there is nothing that has fundamentally changed in our assessment of our break even.

Okay. So we'll offset the pricing with cost reductions and try to hold at the 205, 210 range. Thank you.

And at this time, we have no further questions standing by. I would like to turn the conference back to our speakers for any additional or closing comments.

Thank you. At this time we will end the conference call. We thank everyone for your participation and look forward to speaking with you all soon. Thank you.

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