安捷倫 (A) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2005 Agilent Technologies earnings conference call. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's call, Mr. Hilliard Terry, Director of Investor Relations.

Thank you and welcome to all of you on the phone to Agilent's fourth-quarter conference call. With me are Agilent's President and CEO, Bill Sullivan, and CFO, Adrian Dillon. After my introductory comments, Bill will give his perspective on the quarter and our goals 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 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, you'll find in the investor relations section on our website a reconciliation of any non-GAAP financial measure used on this call and the most directly comparable GAAP financial measure.

In addition, 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 on 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.

Also, given the pending tender offer, we will host our analyst meeting as previously scheduled in December -- we will now do that in February, so we will not be holding our analyst meeting in December. We are doing this -- and we apologize for the change, but until the completion of the tender, we will not engage in any activities such as analyst meetings or sell-side conferences, where our comments could be considered additional solicitation for the shares we plan to repurchase.

With that, I will turn it over to Bill.

Thanks, Hilliard, and hello, everyone. On August 15th, during the first month of our fourth quarter, we announced the strategic alignment of Agilent. We announced the divestitures of our semiconductor-related businesses, semiconductor components as well as Semiconductor Test Solutions, in order for the Company to focus on its core strength as the world's premier measurement company. We strongly believe this strategic alignment will result in increased value to our shareholders and our customers.

I am pleased to announce we have made excellent progress over the last 2.5 months to meet our strategic objectives. The divestitures we announced in August are on track. We expect to close the sale of Lumileds to Philips this month, the sale of SPG, our Semiconductor Products Group, to KKR, and Silver Lake Partners is expected to close on December 1st. We are on track to spin off our Semiconductor Test Solution business with an IPO expected to take place near the middle of the fiscal year. Today, we have announced a $2.7 billion tender offer in order to purchase up to 73 million shares of Agilent Stock as a clear demonstration of our commitment to return immediate value of the realigned Agilent to our shareholders.

While implementing these divestitures, the employees of Agilent continue to focus on the market and our customers. Inclusive of our semi-related businesses, orders in the quarter were almost $2 billion, and revenue was $1.9 billion, the highest order and revenue level in almost four years. Earnings for the quarter were $0.38 per share, at the top of our guidance range. These earnings were exclusive of a $48 million tax charge associated with the repatriation of $970 million of offshore earnings and $119 million composed largely of restructuring costs associated with the announced divestitures.

At this point, I would like to make a few comments about our Electronic and Bioanalytical Measurement businesses before Adrian provides a detailed review of the quarter. Q4 was a very strong quarter for both our Electronic and Bioanalytical Measurement businesses. For the first time ever, both segments exceeded our long-term operating model of 14% operating margin and 21% ROIC. We believe we gained market share as we generated $900 million of new product revenue in the year, $260 (ph) million in Q4 alone. New product revenue is the sum of all new products released over the last eight quarters.

Our Electronic Measurement segment orders increased 18% over last year, 12% sequentially, and were at the highest level since mid-2001. There was good demand across our portfolio of products, with particular strength in our communication measurement products, both wireless and wireline. We are very pleased with the segment's 15% operating profit and 25% ROIC.

Likewise, we had an excellent quarter in our Bioanalytical Measurement business. We had record orders of revenue in the quarter, with good growth in both Life Science and Chemical Analysis markets. Demand for our gas chromatography and mass spectrometry platforms were very encouraging. This business achieved operating margin of 17% and ROIC of 36%, a great result.

To sum up, it was a very strong quarter across the Company. With our businesses performing well and our planned divestitures on track, we are starting FY '06 in good shape. We are excited about the opportunities we see, and we're going to pursue them with energy and focus. We remain comfortable with the fiscal year 2006 operating model we provided during the August 15th announcement.

Thanks again for being with us today, and now I'll turn it over to Adrian.

Thank you, Bill. Good afternoon, everyone. 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 2006 guidance. First, at the Agilent enterprise level, as Bill suggested, Agilent had a very strong finish to a remarkable year, with a fourth quarter that generally came in at the top of our expectations.

The semiconductor-related markets continued to rebound, but nearly all of our businesses exited the year with renewed momentum, and we modestly exceeded our 1.79 to $1.89 billion revenue guidance at $1.9 billion. We believe that the quality of our performance was also good, with gross margins up over 3 points year to year, operating expenses under good control, operating earnings per share at the top end of our range and our working capital ratios at record low levels. As a result, we generated nearly $360 million of free cash flow from operations during the quarter and, for the first time, Agilent hit its long-standing operating target of 21% return on invested capital for the entire company.

As importantly, the transformation of Agilent to a pure play measurement company remains on track. We are confident that the divestitures will close on schedule and that, from an infrastructure point of view, we will be at a parity cost structure by the middle of this new fiscal year. We announced and completed the call of our $1.15 billion convertible debenture, and today we announced a tender offer for $2.7 billion worth of common shares. Overall, we believe we are demonstrating performance indicative of the world's premier measurement company.

Turning to the overall numbers, please note that this quarter, we have had to treat semiconductor products as a discontinued operation. In this call, we will try to give you consistent operating information, both with and without SPG.

New orders in the quarter were $1.98 billion, up 24% from last year. Excluding Semiconductor products, orders were $1.5 billion, up 26% from last year at this time. Currency had no impact on orders, revenues or profitability during the quarter or the year.

Revenues for the quarter were $1.9 billion, up 4% from last year. Excluding Semiconductor, they were $1.41 billion, up about 5% from last year at this time. And, as you could see from the details, Semiconductor was up about 25%, Semiconductor Tests up nearly 40%, Bioanalytical up 9% and Electronic Measurement about flat with one year ago. But our book-to-bill at 1.04 is a lot better than last year's 0.88. And in fact, excluding Semiconductor, our continuing business had a book-to-bill ratio this quarter of 1.07 compared to only 0.9 last year at this time.

Fourth-quarter gross margins of 48% were more than 3 points better than last year, a level of profitability we haven't seen since the year 2000. Electronic Measurement and Bioanalytical Measurement margins were up about 1.5 points, STS margins were up 2.5 points and Semiconductor had margins up 4 points.

Operating expenses were up about 4% from last year, both with and without Semiconductor, and generally were at our targeted operating ratios. For example, R&D at $238 million was up 3.5% from last year at about 12.4% of revenues. Excluding SPG, R&D spending was about $168 million or 11.9% of revenues. SG&A costs at $433 million were also up about 4% from last year and about 22.8% of revenues. Pull out SPG, and we had SG&A costs of about $369 million or 26% of revenues, flat with last year and right on our targeted model.

So operating profits were about $245 million during the quarter, up 42% from last year, a 12.9% operating margin, up over 3 points from last year. Pull out Semiconductor, and we had operating profits of about $196 million, a 13.9% operating margin that was better than last year by over 1.5 points.

Okay, reconciling from operating earnings to GAAP, we had $24 million of other income during the quarter and made a fairly material adjustment to our tax rate, increasing the full-year pro forma rate to 25% from 23% previously, which, by the way, hurt our results by about $0.03 during the quarter. Pro forma net income was $193 million or $0.38 a share compared to $0.30 a share last year.

During the quarter, we had restructuring and business disposal costs of $98 million. We had a $48 million tax charge for the repatriation of $970 million, and we had $18 million of miscellaneous expense and taxes, leaving a GAAP net income of $26 million or $0.05 per share compared to $0.15 last year at this time.

Looking at the balance sheet, in addition to the $26 million of GAAP income, we generated $384 million from net working capital and other cash generation for total cash generation from operations of $410 million. Subtracting out $51 million of CapEx, we generated $359 million free cash flow from operations. Offsetting that CapEx was about $47 million of depreciation during the quarter. And it's worth noting that over the course of this year, we have generated nearly $200 million from working capital alone. We finished the year with $972 million of receivables or an all-time low of 46 days sales outstanding, better than last year by $72 million. Inventories were reduced by $126 million over the course of the year, ending at 900 million or a record low of 84 days on hand.

During the course of the quarter, we also did some financing and repurchasing activity. We had repurchases of $290 million, issuances of about $91 million for net repurchases of $199 million. We retired the convertible for about $684 million; in other words, we consumed about $883 million in financing activity during the quarter. Total change in cash was $531 million, leaving us with $2.25 billion on the balance sheet in cash and equivalents at year end.

Okay, turning to segment information and starting with Bioanalytical segment, momentum improved considerably in this segment during the course of the quarter. Net orders of $402 million were up 10% from last year and up 16% sequentially. Orders for Life Sciences products, which were about 42% of the segment, were up 11% year to year. Demand from large pharmaceutical customers was mixed in the quarter. In the Americas, large pharma spending was softer, while spending picked up at biotech firms. Europe saw a pickup as budgets were released, and Asia remained strong.

We have seen sustained growth from midsize pharmaceutical companies and good growth from generic pharmaceutical companies on a worldwide basis. And in proteomics, we are gaining traction across our product portfolio, including LC and LCMS products. Our time-of-flight and our Ultra XCT Trap mass spec products are making us more competitive in this space.

Orders for Chemical Analysis products, which were about 58% of LSCA, grew 9% year over year. Our large installed base of forensics, chemical, petrochemical, academic institutions and governments continue to drive new and replacement business in both America and Europe, while regulatory initiatives by Asian governments continue to drive demand for test equipment for food, air and water quality.

Our new GC/MS platform is doing very well. Additionally, our chemical customers are starting to utilize LC/MS and time-of-flight solutions in addition to the traditional GC technologies.

Bioanalytical revenues were $382 million during the quarter, up 9% from last year at this time. Revenue growth picked up sharply from the low single-digit growth of the past six months, reflecting our higher orders and a stronger backlog. Gross margins at 51.6% improved by 1.5 points, while the operating margin at 17% was 80 basis points above last year and with the entire difference due to acquisitions. Higher profits and excellent capital management drove an excellent 36% return on invested capital in the quarter, up fully 12 points from last year at this time.

Turning to Electronic Measurement, Electronic Measurement regained momentum in the fourth quarter with orders of $903 million, up 18% from one year ago and up a more than seasonal 12% from Q3. Note that this segment now includes about $80 million in orders from the parametric test and Electronic Manufacturing test businesses that were previously included in the Automated Test segment.

Communications test orders, about 64% of the segment, or $578 million, up 26% year to year and up 13% sequentially. Order growth was strong across both wireless and wireline test. Wireless orders, for example, were up 19% year over year, with the highest level of orders for our wireless one-box tester in nearly two years. While we saw strong seasonal growth from our handset test business for the '05 holiday season, the next significant replacement cycle will be driven by new technologies such as the universal adoption of 3G. And our OSS business, as Bill mentioned earlier, was also very strong again in Q4.

Orders for our wireline test solutions were up 57% year over year, and up fully 31% sequentially. This is the third consecutive quarter of double-digit growth for the wireline test business, although off of a relatively small base. Indeed, the underlying end markets are healthier, and we are seeing a positive shift in telecom CapEx for new technologies. We're also continuing to see strong demand for our router test solutions at both NEMs and at service providers. We believe we are well-positioned to take advantage of the significant test opportunities in broadband access, such as triple play, the voice, video, data services and converged next-generation IP networks.

For general-purpose test, orders were $325 million for this 36% of the segment, up 6% year over year. We saw the traditional US government surge at the end of the fiscal year end, and this quarter we posted the highest level of oscilloscope orders ever, and estimate that our share in scopes is up 5 points year over year. We've expanded the range of products by entering the ultra-low-cost and the high-performance markets, and we saw growth across our entire range of products.

Revenues in the quarter were $866 million, essentially unchanged from one year ago. What is changed from one year ago is the book-to-bill, at 1.04 compared to 0.88 last year at this time. Gross margins at 54.7% are improved by 1.3 points over last year at this time. And indeed, the $3 million improvement in segment profits on $4 million lower revenues was due to a 1.3 point improvement in gross margins. The operating margin of 15.1% was 0.5 points above last year. Return on invested capital improved fully 8 points from last year to 25% because of both higher operating margins and improved capital management.

Finally, looking at Semiconductor Test Solutions, this segment is now composed exclusively of our system-on-a-chip or SOC business and our memory test businesses. This is the business we intend to spin off via an IPO around mid fiscal 2006. The solid rebound in STS continued in Q4, with net orders of $199 million, up over 200% from the trough one year ago. STS and the entire semi test industry benefited from strong demand in key end markets such as PCs, game consoles and wireless handset units.

Agilent's STS business achieved above-average growth in orders, and our utilization rate at SCMs averaged 96% during the quarter, well above the industry average. Of total orders, 100% of our memory test orders today are coming from our new Versatest family, and 80% of our new SOC test orders are from our new 93K Pin Scale system.

In the past, we have talked about our strategic intent to better penetrate IDMs. In the fourth quarter, we had four new high-volume manufacturing wins among major integrated device manufacturers. For the year, we had eight significant new IDM wins and three new fabless wins on top of an already strong base. Today, we participate in all ten of the top ten semiconductor IDMs.

The success of our 93 K Pin Scale system is a testament to the advantages of our scalable architecture. In the quarter, we had wins in our traditional stronghold of high-performance digital applications, but we also had significant wins in volumes in the very cost-sensitive digital consumer applications, including many systems for MP3's, digital TV and DVD parts. Because of the flexibility and scalability of the Pin Scale platform, we are now penetrating entirely new markets, from the cost-sensitive digital consumer applications all the way to high-speed memory test.

STS revenue in the quarter was $159 million, up 39% year to year. Book-to-bill at 1.25 is triple the 0.56 it was last year at this time and equal to what we saw last quarter. This segment wrote off $10 million of inventory associated with the discontinuance of a flash memory test product line. Had it not been for that write-off, the segment would have been profitable this quarter, with gross margins up an additional 6 points to 42%.

Okay, last, turning to fiscal '06 guidance, in the press release we provided first-quarter guidance for revenues from continuing operations, including STS, of 1.28 billion to 1.35 billion, 5 to 10% above last year and consistent with our normal seasonality. Given our Q4 performance and the progress we are making in quickly transforming Agilent's global infrastructure operations, we expect pro forma EPS in the range of $0.25 to $0.30 per share. That guidance is based on the current 512 fully-diluted shares outstanding. We do expect there to be fewer shares in Q1, given today's announcement of a $2.7 billion tender offer, but we didn't want to speculate on the clearing prices for those shares, so we will leave that up to your judgment.

A few other bits of housekeeping. For the full year 2006, we expect a pro forma tax rate of about 25%, consistent with this year's result, capital spending of about $200 million, with about 75 million of that extra spending in 2006 due to separation and transformation-related capital projects. In other words, without the transformation, the ongoing rate is closer to 125 million annually. And next year, we ought to have depreciation and amortization expense of about $180 million.

Options expense is not included in our guidance, and we're not done with our work on that subject yet. However, order of magnitude, we expect the increase in non-cash costs associated with options expensing to be in the range of about $0.20 for the full year of fiscal 2006 -- again, based on the current share count.

Bill mentioned that we are still comfortable with the 2006 operating model that we presented on August 15th. And indeed, with respect to general revenue growth and expectations for operating performance of Electronic Measurement and Bioanalytical Measurement, we remain comfortable with the August 15th projections for the coming year. But also remember that the pro forma model assumed an instantaneous divestiture of SPG, Lumileds and STS, along with the instantaneous removal of over $400 million of global infrastructure costs. In reality, we will divest SPG on December 1, get proceeds for Lumileds this month, and we plan to spin off STS via an IPO around mid-year.

For planning purposes, you should assume STS is in our results for the entire year 2006, since the second-step share distribution isn't likely to take place much before our year end. As for what you should plug in for STS, a continuation of the current level of orders would suggest revenues next year in the $600 million range, plus or minus 10%, roughly 40% above actual fiscal 2005 revenues. With respect to the bottom line, we have already begun the hard work of restructuring STS to lower its breakeven cost structure by one-third from about $600 million annually today to a $400 million annual rate one year from now.

Finally, we're making great progress in transforming our global infrastructure operations. We had previously said that we would be 85% of the way to a lower cost structure by mid fiscal 2006 and at parity by the end of fiscal year 2006. Today, we believe that the extra month of SPG revenue should cover our cost overhang in Q1, and we now expect to be at near parity cost structure by Q2. The costs associated with this rapid transformation are essentially unchanged from our August 15 indications.

With that, let me turn it back over to Hilliard.

Thanks, Adrian. At this time, we are ready to take questions if you could get the queue together.

(OPERATOR INSTRUCTIONS). Deane Dray, Goldman Sachs.

Good afternoon and congratulations. For operating margins in Electronic Measurement, could we get the next layer of detail? If we look at the operating margin improvement, how much would you say came from either price, volume, mix or productivity improvements? Can you disaggregate that for us?

From a first order (ph), as I described in numerous calls over the quarter, we're absolutely committed to get this segment of our business back to the operating model that we had committed to. And we have taken the appropriate action to make sure each of our product lines in this sector are cost-competitive. And you can see, even though we had a very tough compare to Q4 of last year, we made real progress in improving our operating margins, controlling expenses and controlling our assets. So it was a -- net, it was a result of a bunch of hard work by our employees inside of our Electronic Measurement segment.

Deane, I would add to that that this was done with no net leverage from price; this was all hard work of productivity and volume.

And so you commented the ability to sustain these margins into '06. Does that depend on any changes in end markets, or are you assuming the same sort of end market strength?

Based on the end market strength that we had forecast in our August 15th meeting, we are absolutely committed to sustaining these margins over the course of FY '06.

What about seasonal impact? I remember last year, it was uncertain what sort of fourth-quarter benefit you were going to see. Can you give any assessment of what sort of seasonal boost we saw this quarter?

Well, we did, as Adrian said, have a very strong quarter in our wireless area. That is the most volatile part of our business, the wireless cellphone test. And if you look at FY '05, every other quarter was strong, and the ensuing quarters were weak. We tried to mitigate this with other businesses, more focus on the R&D marketplace. But if there's going to be volatility next year, it will be in the wireless cellphone manufacturing area.

And if I can just swing a question over on the cash side, you said 2.25 billion in cash on the balance sheet. Are we still correct in thinking that that has not been allocated as part of the share buybacks? And at what point will you be able to talk about the use of that cash?

We will, in fact, be doing a tender offer and doing some financing to support that. I think we should come back about a year from now. Let's complete the repurchases and the commitments we've made to repurchase, and then see how much surplus cash we have.

Give us some color regarding the timing of the tender offer. This is being done before the closure of SPG. What was the thinking there, and also, within the range, high and low, on the tender offer?

The reason we went ahead and did this is because of the confidence that we have that this is going to close on December 1st for SPG and getting the $1 billion from Philips for Lumileds this month. So we are highly confident of both of those events. And we felt we wanted to do it sooner rather than later, because otherwise we were going to trip into next calendar year, over Christmas and all that. So we wanted to do it while we had as much fresh information as possible.

John Harmon, Needham & Co.

You gave us so many of the details; I'm going to ask pretty specific questions about a couple of product lines. I think in your opening remarks, you said that your sales of your new gas chromatograph were satisfactory, whereas last quarter you said the product was launched late in the quarter, but you got very strong orders. If I understood that right, could you reconcile the two statements, please?

I don't believe I said satisfactory. I said we had good activity from the new gas chromatograph and MS products. So we are actually very pleased with it. I think it was behind much of the acceleration that we've seen this quarter.

Okay, so you were very pleased. And about your router tester, it looks like you're -- the word that comes to mind is repurposing the product. But it looks like you're finding new applications for that same product in things like voice over IP testing, and you mentioned triple play testing, as well. Is that the growth area for that product?

Absolutely. We have a very strong router test platform, very leverageable across almost all applications. And we have made investments to ensure that we have the capability to handle higher protocol requirements, particularly focusing on the triple play. So we were very pleased with the traction that we continue to demonstrate in the quarter.

Paul Coster, JPMorgan.

A couple of quick questions on the Bioanalytics segment, first. As we think about this business a year out from now, will it increase as a percentage of revenues? And is that growth going to be organic or acquired, in the most part?

And the second question is, I think, Adrian, you said that the operating margins on that business were up 80 basis points year on year, whilst the gross margins were up 150 basis points. Was I correct? And if so, what was the drag on the operating margin?

Okay, good questions. First, yes, we would expect that a year from now, that the Bioanalytical will be a larger proportion than it is today. The organic growth rate there is a little bit higher than it is in the Electronic Measurement system, and they have some good growth plans, as we indicated in our August 15th presentation. So, whether it's organic alone or supplemented a little bit by acquisitions, we do expect it would probably be a higher proportion.

On the 80 versus 150 basis points, the entire difference has to do with the acquisitions we've made over the past year. Those were smaller, more technology-oriented, not particularly profitable at the moment but growing like a weed. And that's the difference between the manufacturing margin improvement and the operating profit improvement.

As we go forward with acquisitions, should we expect more of the same, whether it's small tuck-ins, primarily technology-oriented rather than market share sort of accretive type acquisitions?

As I have mentioned in the past, we have three options when it comes to acquisition. The first one are technology acquisitions or, using your words, that we tuck those in; we do those very well, and that's what Adrian described. The second effort is what I would call relatively small adjacent attach (ph) segments to our existing product line. And the third ones, of course, are much larger acquisitions. And right now, where we are to ensure that we complete the divestiture, resize the Company, our focus is to getting our existing commitments done. We are very cautious of a very large acquisition, given the probability of failure. As you know, in the industry, the total (ph) runs 60 to 70%. And we have very strict guidelines to ensure any acquisition we make is accretive as soon as possible.

And the last question is book-to-bill -- is it a sort of consistent measure of all of your businesses? Or as your business involves more towards Electronic Measurements and Bioanalytics, does it change in terms of the significance it has as a lead indicator relative to the SPG business when that was blended in?

Actually, it's probably a better indicator of momentum now than it was in the past, because Semiconductor had a five-day turnaround, whereas, as quick as we are, there's at least a half-quarter to a quarter leadtime for many of our electronic and bioanalytical products. So I would say you could rely a little bit more on it than you have in the past.

Fair enough. What percentage of Bioanalytics is consumables?

About 35%.

Edward White, Lehman Brothers.

In some of the comments that have been made about cost structure reductions in Semiconductor Test and some of the comments that KKR and Silverlake have made about semiconductors, it seems as though there's a lot of room to reduce costs there. Now, I know in your core business, Electronic Measurement and Bioanalytical, a lot of that work had already been done. And that's part of the reason you're getting the margins you are seeing now. But as you take another look at those businesses, do you see opportunities for further cost reductions as you go out over time in those businesses?

We continue to look at cost opportunities or cost reduction opportunities as we are moving forward. But the focus of the organization, now that we are 100% focusing on this measurement market, is about growing our top line. I think that we are in a very strong financial position, have achieved the gross margins that we had set out. And it really is about satisfying our customers and to be able to provide them an even broader range of support so that they can get their jobs done.

On the Bioanalytical Measurement, traditionally one of the areas you were focusing on growing -- and it was a fairly costly effort, at the time -- was genomics. Can you talk about the progress there, whether you're gaining the critical mass you wanted to gain there, and whether you're getting the costs to the level you want in that business?

As you alluded to, we continue to make a very large investment in providing scientists and researchers additional tools to accompany our instrumentation. We have been very pleased with the progress that we have made in this area, the quality of our offerings, the sensitivity of our products, both on the genetics side as well as the proteomics side, and we continue to invest in our instrumentation platform. So we're going to continue to make this investment. It has been a long-term growth driver. And, as we noted, the performance of this business is just outstanding, with a 35% return on invested capital. So we're absolutely committed and we'll continue to make that investment.

And then, across the measurement businesses, you talked about the focus on topline revenue growth. And part of the opportunity there seems to be to move into areas that you might not have traditionally addressed within those markets but that are new ones. And it sounds as though part of that might happen through new product development. Can you talk about some of the areas that might represent opportunities to go into, where you have not been before, and how you're sort of looking at the task of going after some of those opportunities?

Yes. As we had mentioned on our August 15th announcement, there are two particular areas where we believe we can make a contribution. One is in the whole nanotechnology tools market, as well as in homeland security. We have tasked our central research facility to really look at how we can leverage the synergy between our analytical expertise, as well as our electronic expertise, to be able to address these markets. In addition to that, each of the two business segments continue to look at expanding their overall product offering to our customers.

Ajit Pai, Thomas Weisel Partners.

Congratulations, gentlemen, on a very solid quarter. A couple of quick questions. The first one would be, just looking at your geographic mix, you know what it was prior to some of the announcements you've made. But could you give us some color, on an ongoing basis, if you exclude Semiconductor Products Group, what the geographic mix was, and some of the trends you are seeing, broader trends, in terms of geography?

I'm not going to be able to give you the specific numbers off the top of my head, but I can tell you that in general, our penetration in Asia will be about 5 points less without SPG. That was a disproportionately Asian-focused activity. And as far as strength, we are continuing to see the most strength out of Asia, a little bit of a pickup from Japan after a long period of stagnation, moderate growth in Americas and fairly flat growth in Europe with a couple of exceptions. We have gained some real share on the electronic measurement side lately in Europe. So that has helped.

And then, when you're looking at the competitive environment right now, you have US-based competitors, you have European competitors and you have Japanese competitors, particularly in the Electronic Test side. Could you give us some color as to are you facing greater competition right now from your US-based competitors, your European competitors or your Japanese competitors? There was some very solid share gains just based on looking at some of your peer results. Could you give us some color as to whether there are other factors outside of the country that could be more competitive there?

All of our competitors are tough, and they all do a good job trying to beat us. But we have one of the strongest product lines in our history. We continue to invest in research and development. We're winning business with our new products, and I'm particularly pleased with the progress that we made during the quarter in our Asian instrument business unit. As you know, we have an organization both focusing on Electronic Measurement. We announced a joint venture, and our initiative to be able to address the lower-cost and lower-performance instrumentation market. Likewise, we have an Asian center focusing on Chemical Analysis instruments just for the Asian market. So we believe we are well-positioned in each continent and that we're going to be very competitive as we move into the new year.

And looking at gross margins, you talked about 55% gross margins in one of your continuing operations, and about 52% in the other. Now, where do you think those gross margins could go, once your initiatives that you have announced separately for those two businesses -- like in Electronic Test, you have peers that have substantially higher gross margins. Does that mean the best is still ahead of us? And how much could it expand, and then on LSE (ph) as well on the Bioanalytical?

I would say that what we demonstrated in the fourth quarter is hitting, for those two segments, our mid-term operating model. So, by definition, as we get to the higher side of the cycle, we would expect some continued improvement in both the Electronic and Bioanalytical segment margins. That's not necessarily our focus, but we are certainly -- especially as we change the mix to more of an R&D and more of an infrastructure area, the value we can provide the customers is pretty substantial, and so should be the gross margins.

So when you think the spending improving in some of the areas which have higher margin and higher software content -- I think you mentioned OSS as a key area of growth -- when those areas are receiving more money, shouldn't the gross margins expand more materially for the overall business?

Yes.

And the last question is headcount at the end of the quarter and where you expect it to be at the end of fiscal 2006?

The headcount at the end of the quarter was 27,455. But of course, that includes the semiconductor folks and all of the global infrastructure folks. We would expect, order of magnitude, that by the end of next year at this time to be just under 18,000.

Congratulations again on a very solid quarter.

Richard Eastman, Robert Baird.

Just a couple of quick questions. On the Electronic Measurement side of the business, how much revenue was included in the quarter from the ATG component that was absorbed there?

Order of magnitude, 75 million.

Given the book-to-bill in that business, it would appear as though the orders kind of increased and strengthened as the quarter went on. How should we view the first quarter from a seasonality standpoint? Would we build some backlog there, and we'd still expect to see a somewhat softer first quarter in revenue?

Richard, let me make sure you understood my last answer. We did restate all of the data for our segment, so the $75 million that was in this quarter was progressively restated for history, as well. So it's not like a one-time bump up because of that.

No, I understand.

As far as seasonality, like any capital goods company, we still have too much of a back-end loaded business, and we are trying very hard -- one of our initiatives for '06 is to improve the linearity of our orders and our shipments throughout the quarter. But there still is a pronounced seasonality to our business between Q4 and Q1, which is why, despite the fact that we have a pretty significant increase in backlog, we're talking about a 5 to 10% increase in continuing sales in Q1.

And then maybe just a last comment. Just on the wireless handset test business geographically, how did China hold up in the quarter year over year?

Over 80% of the cellphones in the world are manufactured in Asia, and more and more of those are in China. The market is still dominated by the big multi-internationals, as I think it's about 75 to 80% of the whole market is dominated by six manufacturers. So you would say China held up, but again that's driven by the big multi-internationals.

Richard Chu, S.G. Cowen.

I want to make sure that you have not changed your mind about divesting semi tests, given the excellent results.

No, Richard. We have always said that this was the best business in the test industry, and it still is. But we also firmly believe -- and the market has certainly reinforced our conviction -- that the business and Agilent are better off as pure plays.

I wanted to clarify a few things. Rich Eastman asked about the sub business. 75 million is in revenues or bookings (multiple speakers)?

About $80 million of bookings and about $75 million of revenue.

And is the profitability there any different than the rest of the PMO average?

No.

And if I could follow on with wireless tests -- I believe you made a comment that it was either the highest level since a year plus ago, or something to that effect. Could you talk about --?

The wireless hand test business had the highest level of orders in seven quarters.

That's the one-box test business?

Yes, it's the one-box test business.

How would you characterize the business sequentially, in terms of bookings, Q4 versus Q3?

Up substantially.

Up substantially in preparation for the holidays.

And does your guidance for Q1 assume -- what sort of a pattern? Does it assume that that retreats somewhat, or hold up at the current run rates?

If you look at last year, our Q1 and Q3 were quite difficult compared to Q2 and Q4.

So it assumes that the year-over-year comparisons will be pretty easy. But I wonder what happens on a sequential basis?

Sequential, it will go down. Between Q4 and Q1, there's always a sequential drop in that business. Last year was exaggerated, because we did have some inventory in the system that we had to unplug. So hopefully, it won't be that significant of a decline, but there's no question there is seasonality.

Is the shipping level, revenue level in that business roughly mirroring the order rates, or is it lagging behind all of this (ph)?

It lags behind a little bit, but this is a business that has a pretty quick turnaround.

Can you comment on -- are any part of the electronics businesses weak? Your comments are almost uniformly positive. How is the government and DoD business, for example?

Overall, we had a very strong quarter across potentially (ph) our whole product line -- very, very (inaudible).

And pleasantly surprised, candidly. We did come up a little bit better than our guidance range.

Regarding the tender situation, the number that you have used, 2.7 billion, matches roughly the proceeds for SPG. Does that mean that there is another billion in action that might be tied to Lumileds?

We said that we would do $4.266 billion, $4.46 billion over two years. We also said we would consider, once we got the proceeds, jump-starting this. This felt like the right amount at this point in time, so we didn't put all our eggs in one basket, but we will continue to keep our options open.

And did you or did you not announce the tender price range?

We did. 32 to 37.

And finally, I thought you made some comments, with regard to the global infrastructure cost reductions, about the timing of a payment to that. Are you still on the same schedule -- 80% by midyear or thereabouts?

What we said is we'd be about 85% of the way to parity by the middle of next year, and back at parity -- with a smaller company, obviously -- by the end of next year. We have now accelerated that timetable. We think we could get to parity by the middle of next year.

And final thing -- on options, you threw out the number $0.20 before -- on the current share count. That is for the smaller company that you envision?

Correct.

(OPERATOR INSTRUCTIONS). Mark Fitzgerald, Agilient (ph).

On the ATE IPO that's scheduled for the middle part of next year, do you intend to sell the entire company in that, or will you hold onto a position?

We intend to -- with current planning, anyway, to do an IPO of 15 to 20% of shares in order to establish a market and then to distribute the other 85 to 80% before the end of this new year.

And is the cash raised from that == I mean, is that potentially targeted for additional buybacks over and above the 4.6 billion?

No. I suspect that the largest portion of that IPO cash will be put back into STS, to fund its working capital going forward.

And then, the guidance that you've given next year for the core business, if I remember correctly, it's 7 to 8% topline growth.?

I believe it was in the 7% range, yes.

And can you give us any idea how that breaks down -- I assume we're talking core business, which does include the ATE business -- how that breaks down between Bioanalytical and the Test and Measurement?

I'd suggest that you look at our August 15 presentation, where you will see the forecast by segment. And in my comments earlier, I mentioned that STS revenues year to year could roughly be up 40%, given where the orders are today.

So there's no change to that quarterly presentation you gave?

No.

And then, just on the options here, are there any -- do you plan to accelerate any of the options that are out of the money in terms of vesting?

No.

Gentleman, we have no further questions. I'll turn it back to you for closing remarks.

Well, thank you for joining us. Again, I would like to remind you that we will not hold our analyst meeting on December 12th; we will hold it when we announce our Q1 results in February. We'll be back to you with more information on that. Thank you all for joining us, and we will speak to you again soon.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Everyone have a wonderful day.