安捷倫 (A) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen. And welcome to the third quarter 2006 Agilent Technologies earnings call. My name is [Colby] and I'll be your coordinator for today. [OPERATOR INSTRUCTIONS]. I would now like to turn the presentation over to your host for today's call, Mr. Hilliard Terry. Please proceed, sir.

Thank you, Colby and welcome to Agilent's third quarter conference call for FY 2006. With me are Agilent's President and CEO, Bill Sullivan and Executive Vice President of Finance and Administration and CFO, Adrian Dillon. After my introductory comments, Bill will give his perspective on the quarter and the business environment, and Adrian with follow with his view of the financials, the performance of each of our businesses and after Adrian's comments, we will open the lines 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. We are also providing further information to supplement today's discussion. After you log into the Webcast module from our website, you can click on the link for supplemental information. In accordance with SEC Regulation G, if during this call we use any non-GAAP financial measure, you will find momentarily 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 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 only valid as of this date. Company assumes no obligation to update such statements as we move through the current quarter.

With that out of the way, let me turn the call over to Bill.

Thanks, Hilliard and hello, everyone. This quarter's results demonstrated the power of the operating model that we have been putting in place at Agilent. Strong growth and excellent operating discipline produced an all-time high in gross margins and return on invested capital. Adjusted earnings per share of $0.46 was $0.04 above the high end of our guidance and more than double last year 's results.

We accomplished all this while continuing to lever exciting new products to the market. We also brought Verigy to market via an initial public offering. This quarter was an excellent demonstration of the operating leverage that we're unlocking at Agilent. Before I talk about our Q3 results by business, I think it would be helpful to give an overview of the Company's revenue distribution by the markets we serve. At the Agilent level, excluding Verigy, about 70% of our revenue comes from Electronic Measurement and the other 30% is from Bio-Analytical Measurement.

Within each of these segments we serve two broad markets, Electronic Measurement, one segment is focused on communications and the other general purpose instrumentation. Communications include all of our wireless, wireline, and related Design Software products and is about 33% of Agilent 's revenue. General purpose instruments account for about 37% of Agilent 's revenue and include Aerospace/Defense, multi industry offerings, and products for the computer, semiconductor and nanotech markets.

In Bio-Analytical Measurement, the two broad markets are Chemical Analysis and Life Sciences. Chemical Analysis accounts for about 17% of Agilent's revenue with Life Science, another 13%. The Chemical Analysis business includes our solutions for the food, petrochemical, forensic and environmental markets. Life Science covers our sales to pharma and biotech companies as well as government and academic research centers.

In Q3, both of our businesses turned in solid results. In Electronic Measurement we achieved 8% revenue growth, an outstanding profit improvement. This quarter the strength in Electronic Measurement was in wireless communications and general purpose instruments. In Wireless we did very well in Asia and Europe. Demand for low cost phones in China and India as well as investments in 3G manufacturing and for manufacturers components that go into consumer devices drove our results.

We're also winning more business and wireless handset R & D. In this market is about 8% of Agilent's total. Sales to the cell phone manufacturing market are about 11% of Agilent's overall business.

General purpose tasks, the Aerospace Defense sector is down a little bit from last year. The sector accounts for about 10% of Agilent's revenue and we believe we'll see a traditional seasonal uptick in U.S. Government spending in the fourth quarter. Our oscilloscope business had an excellent quarter with strength in the high end market. Overall, our general purpose instruments achieved solid growth this quarter.

The Bio-Analytical Measurement business posted a 15% revenue growth in excellent profitability in Q3. Our results were driven by our strong new product portfolio and a diverse global customer base. The new HP 1200 HPLC series is winning excellent market acceptance worldwide. Europe And Asia achieved solid growth while the U.S. was flat due to the ongoing weakness with large pharmaceutical customers. Our strong results in China were fueled by strengthen our core business, chemical, service, consumables and pharma. New environmental regulations in China are a key market driver there.

In addition, we're benefiting from our growing opportunity in food safety in Asia. The increased investments in basic and contract pharma research in India are also driving our success. So overall, it was an outstanding quarter for us. I'm pleased with the progress we're making and I believe the opportunities we have are exciting.

During Q3, we completed Verigy's IPO, the Verigy Management team will talk about its results in a separate call later this afternoon. We completed our share repurchase program during the quarter with a total of 125 million shares repurchased for $4.5 billion. During the quarter we finalized the sale of our Palo Alto headquarters building, our consolidation in the Santa Clara campus is completed in the first half of September. Finally, our global infrastructure organization continued to make great progress on its cost structure. We further streamlined our IT and workplace service activities and these improvements along with additional outsourcing were major factors in GIO's excellent performance. Within GIO, most of our functions have now reached a cost structure that's more appropriate for Agilent today. We plan to make further improvements that will move us beyond parity to industry leadership.

Our focus moving forward will be on achieving the sustained revenue growth that is critical to leveraging our operating model. Our primary strategy is pursue organic growth where we focus on expanding our leadership position as well as moving into adjacent markets. We are supplementing this with acquisitions which we are doing selectively but steadily, and we've made eight acquisitions in the last eight quarters. As we have said, the goals outpace the growth in our markets.

We see a number of opportunities to do this. In Electronic Measurement we're focus on the Aerospace and Defense market, communications, and general purpose instruments. With a particular focus on entering the market for low cost instruments by leveraging our excellent Asia R & D and manufacturing capabilities. In Bio-Analytical Measurement we're focusing on opportunities in life science including the informatics market.

Our new product program is producing good results. For example, initial market response to our new family of mass spec products has been excellent. We will continue to implement an ambitious new product program in Life Sciences. We're optimistic about the opportunities in our markets. We're bringing the same level of focus to the growth challenge that you have seen us apply to our operations and cost structure over the past few years. At the same time, we'll remain vigilant in tracking the economic environment.

For the fourth quarter, we expect revenue, including Verigy, to be between $1.48 and $1.53 billion, an increase of 5 to 9% over Q4 last year. We anticipate adjusted net income to be in the range of $0.50 to $0.55 per share which would be nearly double the comparable earnings from last year.

Thanks for being on the call today. 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 fourth quarter guidance.

Overall, Agilent performed well in the third quarter. Orders of $1.42 billion were 10% ahead of last year. Revenues of $1.45 billion were up 17% from last year, and above our expectations both because of the sustained strength of Verigy and because of the 10% growth from the continuing operations of new Agilent. Adjusted net earnings per share at $0.46 were $0.04 above the high end of our guidance and more than double last year's results, because of the higher than expected revenues and great operating discipline across the businesses.

We believe the quality of our performance was also good with gross margins up about five points from last year to the highest levels ever, discretionary operating expenses under good control, inventory days on hand below 100 for the second consecutive quarter, and return on invested capital at a new Company high of 27%. During the quarter, we brought Verigy to market via an IPO despite very difficult market conditions, and our preparations for completing the spinoff by Fiscal Year End are on schedule.

Finally as Bill noted, we have successfully reduced Agilent's global infrastructure cost commensurate with our size and profile as a pure play measurement Company. And we'll go from parity to industry leadership over the next six months. Overall, the transformation of Agilent that we announced just over a year ago is virtually complete. Today, as the world's premier measurement company, we're focused on leveraging the robust operating model we've built through higher, sustainable growth.

Okay, turning to the overall numbers? In the third quarter we had orders of $1.42 billion, 10% above last year. If we look just at new Agilent, excluding Verigy orders, we had orders of $1.23 billion, up 6% year to year. Geographically, orders were about flat in the Americas, up 1%. We saw 10% growth in Europe and 9% growth in Asia Pacific.

Turning to revenues. Total revenues of $1.45 billion were 17% above last year. Excluding Verigy, revenues of $1.24 billion were up 10% year to year and again the geographic profile was quite similar with revenues up about 2% year to year in the Americas, up 13% in Europe and up fully 18% in Asia Pacific. Third quarter gross margins either for total or new Agilent were at the highest levels on record. Gross margins in the quarter were 55.5% up more than five points from last year. New Agilent gross margins at 56.5% were up 4.5 points from last year.

It is worth taking a couple of minutes to discuss total operating expenses because as reported, they were up 11% from last year. First, as you know, the Company has become much less manufacturing intensive, especially since the divestiture of Semiconductor Products. As a result over the past year, we have changed the allocation of general corporate expenses moving more of that cost to operating expense and out of cost of sales. That change artificially boosted OpEx in Q3 by $11 million versus last year and reduced our cost of sales by the same amount.

Second, as we discussed last quarter, Agilent's variable pay program which pays nearly every Agilent employee a 10% annualized bonus when Agilent hits it's 21% ROIC operating model is having a measurable impact on our costs. This program, which also aligns employee and shareholder interest, can vary from 0% in difficult times to a 20% bonus when times are great. With the record 27% ROIC in the third quarter, we are now accruing above target payouts for our employees to reward them for our good performance, and that has increased our year to year costs by about $21 million. Adjusting for both of these items, one simply a shift from COGS to OpEx with no bottom line impact, and the other real but varying systematically with our profitability, total operating expenses were up 5% year to year rather than the reported 11%.

As reported, we had R & D expense in the third quarter of of $180 million, or 12.4% of revenues right on our targeted operating model. We had SG&A of $395 million or 27% of revenues, again at our operating model. Total operating profits at $231 million were up 120% from last year. The Company's operating margin at 15.9% reached a new high during the quarter. The operating margin for new Agilent at 15.0% was up four points from last year.

Okay, moving from operating earnings to GAAP results, we had $29 million of other income during the quarter, of which $27 million was net interest income, compared to $21 million, one year ago. Our pro forma tax rate was unchanged to 25% resulting in $195 million of pro forma net income or $0.46 per share, more than double last year's $95 million or $0.19 per share. Table five of our press release financial tables provides a detailed reconciliation from non-GAAP to GAAP income.

There you will see charges of about $86 million related principally to the spinoff of Verigy and the reduction of Agilent's infrastructure costs as well as $21 million of non- cash stock compensation expenses. These charges are more than offset by net gains of $145 million from the sales of real estate, our retirement plan curtailment gain, other miscellaneous items and the benefit of a lower GAAP tax rate. The net result is third quarter GAAP net income from continuing operations of of $233 million or $0.55 per diluted share compared with $54 million or $0.10 per share at last year's third quarter.

Turning to cash, we have already mentioned the good working capital performance with inventory days on hand remaining below 100 for the second consecutive quarter and 12 days better than last year. And receivables day sales outstanding at 53, one day below last year's results. However, the strength of Agilent's cash generation this year has been somewhat obscured by the fact that we have reflected virtually all of the costs of the Company's transformation in the operating cash flow statement and capital spending while all of the proceeds from asset sales that we indicated would pay for the restructuring have been captured in cash flows from investing activities.

In the seasonally weak third quarter, for example, we generated $65 million of cash from operating expenses, despite $86 million of restructuring and separation costs, or a net $5 million in positive free cash flow after subtracting $60 million in capital spending. The next line down in the cash from investing section identifies the $116 million that we realized from sales of real estate during the quarter, more than offsetting the quarter's restructuring costs.

Year-to-date, we've generated $233 million of cash from operations and $68 million of free cash flow. Now, if you add back the additional $136 million we've spent in restructuring this year and the $108 million in addition all tax payments we made this year mostly related to last year's repatriation of offshore earnings from the Homeland Investment Act, and subtract the additional $25 million in capital spending related largely to the build out of our new Santa Clara headquarters, Agilent's year-to-date free cash flow generation is about $337 million, or nearly nearly $100 million more than the $240 million we generated year-to-date last year at this time. As Bill mentioned we also completed our share repurchase program, spending $700 million during the quarter to complete the $4.466 billion program.

Bottom line? We finished the quarter with $2.25 billion of cash on the balance sheet, and as you know, the fourth quarter tends to be our strongest quarter for cash generation. Okay, turning to segment information. Bill has already given you some color commentary on segment results but let me give you the numbers and a few more details.

Bio-Analytical Measurement gained momentum during the third quarter, reflecting strength of it's new product portfolio and a diversified global customer base. Orders of $387 million were up 11% from last year. As Bill mentioned, we saw strong demand for our new 1200 high performance liquid chromatograph series as well as from our new LCMS systems and that is the triple quad and single quad MS systems. Highlighting the strength in Asia, we saw orders from India up 16% from last year and from China up 28%.

Chemical Analysis orders were up 10% from last year and this performance reflects very strong demand for the new LC and LC MS products into the environmental, food testing and forensics markets in both developed and developing economies. Higher oil prices also continue to drive both increased demand for instrumentation in the petrochemical and hydrocarbon industries, as well as for systems upgrades to refinery infrastructure. Orders for Life Sciences products were up 13% year-over-year, although not new news, pharma spending remained relatively soft in the Americas, up about 6% year to year; however we saw 14% growth in orders from Europe and 11% growth in Asia.

Contract research organizations or CRO's and generics continued to grow and benefit from drugs coming off patents. CROs are also getting more business from large pharma companies as they try to both speed drug development and reduce costs. In light of these trends, we continue to refocus our sales efforts to take advantage of opportunities at CROs, small to mid size pharma, and generics. Third quarter Bio-Analytical segment revenues of $391 million were 15% above last year. After seven consecutive quarters above 1.0, the segments book-to-bill was at parity in the third quarter as shipments of our new product portfolio began to catch up to the previous strength in orders.

Operating profits of $60 million were up $18 million from last year, or 43%. Gross margins were up 4.5 points from last year. Operating expenses for acquisitions, new product introductions and incremental investments grew slightly ahead of revenues but the operating margin of 15% was three points above one year ago and a new third quarter high. ROIC of 26% was about unchanged from last year, largely due to the impact of the Yokogawa Analytical Systems buyout that we completed in the Second Quarter.

Third quarter Electronic Measurement orders were up 4% from last year to $838 million. Communications Test orders which represent approximately 47% of Electronic Measurement grew 2% year to year. Tests showed more strength with orders about 5% above last year. Japan and Europe were particularly strong in wireless tests driven by upgrades related to handset manufacturing and their 3G infrastructure related investments. We're also seeing order strength in the developing countries such as India and China as they continue to spend on 2G-related investments.

As Bill mentioned, we are winning more business in Wireless R & D. More R & D is needed as wireless technologies converge within phones such as adding GPS, MP3 players, WiMAX and Bluetooth, increasing the overall complexity of the units and increasing opportunities for Agilent. Wireline test orders were down 13% year to year due in part to continued softness in the router test business. Our operation support solutions business was also down year to year with weakness in the Americas due to consolidation in the telecom market and from increasing competitive pressures in our marketplace. General purpose test, which represents about 53% of Electronic Measurement, grew 7% from one year ago.

Aerospace Defense was down modestly from last year's level after being up a bit in the Second Quarter, illustrating the volatility in this market resulting from shifting war priorities; however the traditional year-end spike in government spending should allow for strong Aerospace Defense orders in Q4. Longer term drivers of Aerospace Defense strength include the recapitalization of U.S. Military equipment and the increased focus on Homeland Security.

As Bill mentioned, our real-time oscilloscope continues to outpace growth in the market with orders up 11% year-over-year and with particular strength in the high end. Electronic manufacturing test was also strong again, posting 15% year to year gains. We also saw 17% annual growth in our basic instruments which are used in R & D, design validation, and manufacturing, which sell across a broad range of industries and which are particularly strong in Asia.

Electronic Measurement revenue of $848 million was up 8% from last year. Segment gross margins improved five points to 58%, a new high, while operating expenses moved in line with revenues. Operating margins rose five points to 15% while ROIC improved nine points to 24%. Finally we're not going to comment on Verigy's results or prospects other than to say we believe they are excellent. The new Company is taking full advantage of the semi-test up cycle while profoundly transforming its operating model. We invite you to listen to Verigy's conference call led by CEO Keith Barnes and CFO Bob Nichols immediately after this call.

Turning to fourth quarter guidance, and thinking about the remainder of this year and into 2007, we are remaining vigilant about the potential economic environment as Bill mentioned. In that context, however, it is probably worth noting that as a result of the divestitures of our semiconductor related businesses over the past year, Agilent has not only increased it's secular growth rate by about one point to around 6%, but we have also reduced the average volatility around that secular trend by roughly two-thirds. Bill's comments about the distribution of our markets illustrate the reasons for that enhanced top line stability.

Geographically we are also well balanced with about 40% of new Agilent revenues coming from the Americas, 24% from Europe, and 36% from Asia. The new Agilent is much less sensitive to consumer electronics markets directly or indirectly. With respect to Q4 guidance, you should assume that Verigy will be included in our results until the end of the quarter. Repeating fourth quarter guidance, we anticipate revenues of $1.48 billion to $1.53 billion or up about 5-9% from last year's fourth quarter. That would represent normal seasonality compared to Q3. Adjusted earnings per share are forecasted to be in the range of $0.50 to $0.55per share, nearly double last year's comparable earnings.

With that, let me turn it back to Hilliard.

Thanks, Adrian. Colby at this time, if you could open the call to questions?

[OPERATOR INSTRUCTIONS]. Your first question comes from the line of Deane Dray with Goldman Sachs. Please proceed.

Dean, are you there?

Yes. Sorry about that. I have two questions. First, on the guidance, and then secondly, about your wireless businesses and outlook. First, on the guidance. Typically for fourth quarter you've talked about the fourth quarter being about $0.10 above third quarter results based upon the seasonality. This looks lower versus what you did in the third quarter. Is there anything going on different? Did you pull in any orders or any business in the third quarter or how should we think about that?

Well, as you know, we just did an outstanding Q3 in moving in Q4 we had moved our guidance up quite a bit from last quarter. There are two things that we're working on. First of all, the market acceptance of our high end mass spec has been very very good. All the production ramp is during this quarter and that has to happen and so again, we're right on schedule, but there's obviously risks associated as we ramp up all these new product families, and the second area is that in Electronic Measurement, Q4 tends to be a very strong order quarter. Typically these orders come in at the end of the quarter and so therefore aren't able to ship in time, but overall, we have a fair amount of momentum going to the quarter and I'm quite confident in the guidance that we've provided.

Okay, and then on the wireless business, you were helpful in breaking out the components of what the new Agilent looks like. Could you give us the next layer of detail on the communication test side, how much is wireline on a percent basis and then within wireless roughly how big the handset test market is, R & D tests and maybe infrastructure tests?

Hi Deane, this is Hilliard. There's also some supplemental information that goes with additional detail that you can get off the website.

So --

I'll quickly give you the numbers. Wireless manufacturing is 11% of the Company's revenue and this includes the whole supply chain, not just the final cell phone test. Wireless R & D is about 8% of our business and again these are all year-to-date-type businesses. Wireline is 6%, wireless monitoring or the operating systems is 5%, software tools to support this industry are 2%, and wireless installation and maintenance is 1%. All of these percentages is a total percentage of Agilent revenue.

Great. And last question on the R & D test side for wireless, I know that's initiative to increase your business there. Could you give us a sense of what the timing might be, and what those initiatives are?

Well essentially, the market for wireless R & D is actually larger than the market for wireless manufacturing, and we have been focusing and providing the tools to the next generation of tools for engineers who develop the next generation of devices and our growth rate in that segment of the market has been quite good, and we believe over the relatively short period of time that that part of our business can exceed or will exceed our wireless manufacturing business.

And what time frame?

Well hopefully we'll do it by the end of next year we'll be in great shape.

Great. Thank you very much.

Your next question comes from the line of John Harmon with Needham & Company. Please proceed.

Hello, good afternoon.

Hello.

I hope you can hear me.

Yes.

A couple questions, please. Back to Deane's question about wireless task, are you adding functionality to your one box tester or are you developing a brand new instrument for that for the R & D market?

Well, no, clearly this instrument can be used in the R & D market but we have a whole range of instrumentation that will be used inside that market versus the new generation of sources and spectrum analyzers as well as additional engineering tools to allow engineers to do a better job at designing their products so again, we have a very broad offering in this area.

Thank you. And regarding your LXI-type instruments, can you have an expectation or a goal looking a couple years in the future at what percentage of general purpose might be, these kind of faceless instruments?

Right. The primary focus of our LXI initiative is in Aerospace and Defense and the last time the U.S. Government recapitalized the instrumentation in the armed services it was a $0.5 billion investment so that is the initial focus inside of our LXI activity. So again, that will be primarily determined by the rollout of the technology over the next few years.

Thank you. And one final quick one. I think your expectation was for your IBS business within Bio-Analytical to become profitable towards the end of the fiscal year. Is that on track?

We're still targeted to get to profitability by the end of Q4.

Thank you.

This will obviously be helped as we start ramping up and shipping our high end mass spec platforms.

Great. Thank you very much.

Your next question comes from the line of Paul Coster with JP Morgan. Please proceed.

Thank you, we were positively surprised by a couple things here and one was gross margin. Can you talk just a little bit about the particularly the Electronic Measurement side. To what extent this was a function of the mix and new products in particular versus volume and pricing, are you enjoying sort of benign pricing environments at the moment?

Yes, in terms of the overall gross margins, we continue to optimize our whole manufacturing strategy. We've also continued to move some of our manufacturing into our Asia plants and so that's obviously had an impact. Secondly, we've been very pleased with the market acceptance of our new product offerings as well as all the associated software and support that go along with that so I'd say it's a combination of the continued focus on the manufacturing excellence as well as the introduction to new products coupled with continued improvement in GIO which Adrian may have a few comments on just the great progress, our whole global infrastructure organization is doing in getting costs out of the system.

Yeah, we mentioned really last year that we were going to drive infrastructure costs down, not just in proportion to the reduction in the revenues but we were going to go a full percentage point of operating margin beyond that as we get the benefits of simplification and being a pure play measurement company. We're making great progress as Bill mentioned on the outset and achieving that so that is also being reflected in the margins.

I think you talked about bringing out low cost in instrumentation for the Asia Pacific market, Bill. When you bring out those new products in that category, are they dilutive to the corporate average gross margin or do you believe they can still be delivered with these kinds of gross margins in mind?

They will, the new product introduction that we're doing for low cost instruments will meet our cost of sales operating model as we have detailed in the mid cycle of the gross margins around 55%. We're obviously in the higher end of the cycle and so we had a great gross margin last quarter, but this effort will not materially degrade our overall gross margins and again this will be an Asian based initiative with a cost structure set up in place to be able to compete in the segment of the market.

Last question, Adrian. Other income in the past, there's been interesting and other items in there. It looks like the other items are dwindling away. Is that pretty much the pattern for the future that we'll see it predominantly being interesting coming from this point forward?

Yes, I think that's a very safe assumption going forward.

Okay, thank you.

Your next question comes from the line of Ajit Pai With Thomas Weisel Partners. Please proceed.

Yeah, good afternoon and congratulations on a very solid quarter.

Thank you.

A couple of quick questions. The first one is just looking at the last 10-Q, you talked about 60% of your business in the last quarter is on contest orders being from communications test as the percentage of the Electronic Measurement business. This time around you're telling us the mix has changed quite materially, 47-53. Could you give us color as to what drove that change, whether you've actually changed the way you classify some of the business and or whether there's been a material change in business conditions in those two businesses?

First over, as we move forward in the new Company, we're doing I think a lot better job of looking from a market and because we have such a large customer base, sometimes it's not that easy tracking exactly where our instruments go, but we've had a major effort to make sure that we have just a much better understanding of exactly where our instruments go and what segment of the market, so in fact the methodology has changed. Secondly though, our wireline business and our wireless monitoring business are down while LCA continues to grow faster than Electronic Measurement so just mathematically you'll see a shift as well. But it's a combination of mix as well as methodology change.

And the GP test, was there anything else that was classified now as GP test that was earlier classified as contest, now, less in terms of customer base and more in terms of a product Group? Which is an example if on oscilloscope today is sold to a communications client, would that fall under GP test or under communications test?

Actually this is Adrian and that's precisely the definition of the change that we have made. In the past, for simplification purposes, we have said that all oscilloscopes would be in general purpose and we do not do that kind of detailed discrimination and where did they in fact go in the marketplace. We in essence took the majority went into one market it all went in there and that way we could give quarterly information but it wasn't precise on the margin.

What we have now done is gone and done a very robust analysis in the end uses of each of these instruments and those are the numbers that Bill was discussing and that's up on our supplemental information. Going forward we will be providing that kind of information on a quarterly basis as best we can, but literally we're looking at trying to look at each of those instruments at it's end use market and not being overly simplistic, just categorizing everything.

So it's fair now that the general purpose test business does not have any communications exposure?

Correct.

Okay, and then on the peri- metric test and the flat-panel test business, are these still a portion of the general purpose test business?

Yes.

Completely; okay.

And that would be captured on peri- metric test most of that would be under what we call come computer semiconductor and nanotech segment of general purpose task which is about 9% of the Company's business.

Okay. And then looking very broadly at communications test business, it's become a smaller percentage of your revenues and you did talk about wireline being somewhat soft as well as the OSS business. Now, are these two areas areas that you're de-emphasizing or do you expect business momentum to turn over there? What do you see in the end markets and do you think that margins for the overall Electronic Measurement business can expand further from where they are now?

First of all in terms of the OSS segment, wireline, the slowdown in wireline is pretty well documented the industry. There's consolidation in that market and as a result of that people are rationalizing their overall investment. We are not de-emphasizing at all our wireless monitoring or OSS business. In terms of the overall gross margins, again there's always opportunity and we'll continue to try to improve our gross margins but our focus as we move forward is to outpace the growth of the market and we believe we're just in a great operating position, a whole new family of new products across a spectrum of the markets that we support to really try to accelerate the growth of the Company.

And then the last question would be about the cash balance in your cash flows right now. I think you talked about eight acquisitions in the past eight months. Is that the right number or the past eight quarters?

Eight quarters.

Eight quarters, but could you give us some color going forward, what percentage of the cash do you intend to use for further potential buybacks and what would be considering in terms of acquisitions and what kind of acquisitions and what are the uses of cash you might have?

Well the first use of our cash is to continue to invest in the business and we continue to look at opportunities to where we can grow our existing product family or move into adjacent space and to be able to capture a reasonable share of that market at an accelerated growth rate. To date, outside of the Yokogawa JV buyout, our acquisitions have tended to be relatively small but ones which we could leverage our sales channel and our position around the world. We're going to continue to look at opportunities to accelerate the growth of our business. As we've done in the past and just completed a $4.5 billion stock repurchase, we're absolutely committed to return additional value back to the shareholder either through stock repurchase or dividend.

Okay, thank you so much and congratulations again on a great quarter.

Your next question comes from the line of Edward White with Lehman Brothers. Please proceed.

Hi. I was wondering if you could talk about the time frame for your goal of out pacing the growth of the industry. Is that looking at over say the next 12 months or what will be the time frame metric that you'll use for that?

Well as you can imagine, Ed, we want to outpace the growth of the market every quarter that we have.

Yes.

And our internal plans are consistent with that aspiration.

Okay. And then secondly, in looking at the orders for the quarter they're up nicely year to year, down somewhat sequentially. Is that due to purely seasonal factors and would we expect that to jump back up in again in the fourth quarter?

Absolutely Ed. That's our normal seasonality.

So there's nothing in there that, is a flagged or anything like that, indicates any problem out there in the markets?

Nope.

Okay. Third question is how much of the -- you mentioned the cost, some of the cost was shifted from cost of goods sold to expenses, to operating expenses and you mentioned the impact of that but can you go back and give us the number on how much that was -- how much that was and over what time frame?

It was an an $11 million year to year increase, pure shift in that amount of general corporate expenses, out of cost of sales, and into operating expenses. It made the shift that mid year so you'll continue to see that artificial change for the next four quarters.

Okay. Finally, and I know this is hard to do a little bit, but as you look out to the next year, there's a lot of concern out there in the industry about the health of the overall electronics markets, how well they might do in the 2007 after a good year, in 2006 so what are your early thoughts on that?

I wish we knew the answer as well as everyone else. We had a very strong Q3 and we're very cautious for next year as Adrian just said. We're moving to Q4 which is our stronger quarter and there's no signs at all of a slowdown, but we're just as concerned as everybody else that the topic of conversation.

Okay. Great. Thank you.

[OPERATOR INSTRUCTIONS]. Your next question comes from the line of Richard Eastman with Robert W. Baird. Please proceed.

Could you just go over the tone of business on the BAM side of the business? The orders again were down a little bit sequentially typically an up period for you in that business and I'm curious again it may be seasonality but are you comfortable here that you're really coming off with higher quarters that were maybe artificially inflated by the new products?

Richard, I think our third quarter is seasonally weak so we did not see any surprises in our orders compared to our own expectations.

From third quarter, second quarter or third quarter ?

Yes.

Okay. And then could you also just maybe give us a little bit of a feel for how the IBS business, we're still expecting that track towards breakeven but what, assuming you get to breakeven can you give us a sense of what the margin pick up would be on a consolidated basis for the BAM business?

Well the IBS is really two parts. One is instrumentation and the second one is what I call life science tools or sample preparation, and so the major effort in Q4 is to ramp out or ramp up, and meet the shipment requirements of our new mass spec platforms that we have introduced so that's task number one, so obviously as we ramp that up and all the expenses that we have put into developing these products we'll start to be offset.

The second part of that business is in our [microfruitics] and microarray business. We just introduced a high density microarray and we continue to have leadership in the whole area of gene location analysis, CGH, which is another type of Measurement so we're excited in those types of opportunities and [microfruitics], we also have additional exciting products we've introduced but the story in Q4 are really two. One is making sure we meet our customer commitments to ramp up our my high end mass spec platform and secondly is continued market penetration on our microarray business as we do both of those successfully we'll meet our goals.

As you recall we also have said list or that going from the positions that we had had to a breakeven was worth about three points to the segment operating margin, and we did make some progress in the third quarter but there is more progress yet to go.

Very good. Thank you.

Your next question comes from the line of [Ashraf Hawk] with Chesapeake Partners. Please proceed.

Hi. I was wondering what your plans are for the cash on the balance sheet, when you might return that to shareholders and what form that return might take.

To answer the previous question, the first use of the cash is a continued investment in the businesses and again, we are very cautious at doing that in acquisitions well aware that acquisitions are difficult to pull off and but we have very high hurdle rates to make sure we can get to return on invested capital by the end of year three on acquisition and that's focus number one. Number two would be to continue to return cash to our shareholders through a stock repurchase plan of which we've already done $4.5 million or a dividend and again, the process is pretty straightforward. Adrian and myself working with the Board of Directors continuing to look at the uses of cash and we would get the normal approval and then make that announcement.

Your next question comes from the line of Mark Fitzgerald with Banc of America. Please proceed.

Have you seen any shift in business away from the handset manufactures in Asia and the no name brand to the brand name people like free scale and Nokia?

Not sure about the question. Excuse me, mark, about free scale?

Well there's some speculation that name brand guys are taking market share in Asia and the low end part of the marketplace and I'm wondering if you see any of that in your own business in terms of the sales of some of the wireless testing equipment.

I'm still not quite sure that I understand the question. The top six handset manufacturers in the world still dominate the market and that has continued.

Let me ask it a different way. Do you sell into the Asian handset manufacturers, the --

Absolutely. We test 65-70% of the world's cell phones, over 80% of the cell phones in the world are made in Asia.

Have you seen any weakness in that segment of the marketplace?

Well what we have seen, clearly, a lot of the growth has been in the low end cell phone as they try to get a different price point to try to get more subscribers. We are not seeing growth in additional product lines inside of this market where we are seeing upgrades of the existing product lines and given that we have such a large market share that that has been healthy for us.

Okay. Now, just an accounting question here with the spinoff of Verigy, can you give us some sense of what happens with the option expensing here? I assume some of that is going to go with the Verigy spinoff?

That's correct in that the amount that would be to Verigy employees and go with them. How much that is, I don't have off the top of my head, Mark.

Okay.

I will get back to you on that roughly speaking.

Thank you.

Your next question comes from the line of [Randy Phillip with Motor Rock Capital]. Please proceed.

You did mention this before, thank you, but in terms of stock buybacks maybe you could talk about what you're thinking now -- your stock's pretty cheap and your balance sheet is rock solid. It would seem like it would make a lot of sense to entertain a significant buyback. Have you -- where is the Company with regards to buyback?

As I said, we continue to look at all our options for cash and we're absolutely committed to do the right thing for our shareholders.

Okay. Well, I certainly vote for a buyback. I think it makes a lot of sense given your cash position and how cheap your stock is.

Thank you.

This now ends our Q & A session so I will now turn the call over to Management for any closing remarks.

Thank you very much for joining us this afternoon. We look forward to chatting with you again in November when we report our Q4 results. Thanks for joining us.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day!