安捷倫 (A) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2006 Agilent Technologies Incorporated earnings conference call. My name is [Danelle] and I will 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, Vice President and Treasurer. Please proceed.

Thank you, good morning, and welcome to Agilent's fourth quarter conference call for 2006. With me are Agilent's President and CEO, Bill Sullivan, Executive Vice President, finance and administration and CFO, Adrian Dillon. After my introductory comments, Bill will give his perspective on the quarter and the business environment, and then Adrian will follow with his review of the financials and the performance of each of our businesses. After Adrian's comments we will open the lines and 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-in, please log into the webcast module and click on the link supplemental information. You will find additional information such as our end market revenue break out and historical financial information for Agilent [inaudible] operation.

In accordance with SEC Regulation G, if during this conference call we use any non-GAAP financial measures, you'll find in our website the required reconciliation for the most directly comparable GAAP financial measure. In addition, I'd like to remind you that me 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 of the factors [inaudible]. The forward-looking statements including guidance provided during today's call are only valid as of this date. The Company assumes no obligation to update such statements as we [technical difficulty].

Lastly, before I turn the call over to Bill, I'd like to remind each of you that we will host our annual analyst meeting on Tuesday, December 12, 2006, here at the Agilent Technology headquarters in Santa Clara, California. The meeting will focus on our growth initiatives, as well as our forward view of the business environment. Our executive management team will be available as well as leaders from several of our key businesses.

Now with that out of the way I'll turn the call over to Bill for his comments.

Thanks, Hilliard. Hello, everyone. Q4 represented a milestone for Agilent. We completed a distribution of Verigy shares to our owners, which marked the completion of our transformation to a pure play measurement company. With that, my comments today will focus on the new Agilent and its continuing operations. For FY '06 orders were $5.1 billion and revenue was $5 billion, both up 6% over FY '05. Adjusted income from continued operations was $656 million, an increase of 42% over the previous year. Turning to the fourth quarter, our results continued to demonstrate the strength of our operating model that we have created Agilent. Orders were up 7% over last year, while revenue increased by 6%. Operating margins reached 17% and our 29% return on invested capital for the quarter represents a new high. We have the highest backlog in half a decade and good momentum going into FY '07.

Turning to our results by business, our Bio-Analytical Measurement business posted 9% revenue growth, record profitability, and excellent return on invested capital. Results were consistent with our normal seasoned pattern and reflected strong demand across virtually all of our markets. Geographically we saw regional strength in Europe and Asia, particularly in China and India. Our Bio-Analytical business is composed of -- comprised of two areas, Life Science and Chemical Analysis. In Life Science we continue to see a positive impact from our recent product introductions in LCMS instruments and microarray. We are seeing some rebound in large pharma spending and our fastest growth is in biotech.

In Chemical Analysis our new products were in good demand in food, forensics and environmental markets. The food and environmental markets are particularly strong in Europe and Asia due to increased testing demand from new regulations. In state and local governments in the Americas continue to spend for forensic applications. Looking forward we expect first quarter revenue performance in Bio-Analytical to be supported by record backlog and calendar year-end customer delivery.

Turning to the other side of the house, our Electronic Measurement business saw a 5% revenue growth, solid profitability, and good return on invested capital. Growth was driven by underlying customer demand in several key markets, including semiconductor design and verification, and consumer electronics design and manufacturing. However, growth was impacted because of two factors: First, we saw a decrease in our wireless handset test business due to a tough year-over-year compare. Second, we had a slowdown in our wireless monitoring business, as the industry transitions from 2G to 3G networks amid stronger competition. If not for these two factors Electronic Measurement would have revenue growth in the 8% range. Within Electronic Measurement, the general purpose market had a record here in oscilloscopes. We had good growth in semiconductor design and verification. And we're seeing pre- holiday manufacturing ramp in the consumer electronic supply chain. And defense spending and surveillance was up in the U.S. and Asia.

In the communications market, we had an excellent year in network analyzers and signal sources. I've already mentioned some of the factors that affected our results. We did see strong double-digit growth in wireless R&D, one of our key growth initiatives. This market is being fed by continued investment in next generation technology. Looking forward, Electronic Measurement revenue growth for Q1 looks promising, given the strong orders in Q4 and our strong product portfolio going into the new year. In addition to completing the spinoff of Verigy, we also announced a share repurchase program of up to $2 billion over the next two years. This brings Agilent's total share repurchase committment to $6.5 billion. As you recall, we've completed our initial $4.5 billion share repurchase program in June.

Last quarter, we also completed our acquisition of Xpedion Design Systems, a leading provider of RFIC simulation and verification software. You've heard me talk about Phase I and Phase II of our Company. With the spinoff of Verigy, Phase I is now complete and the Company is fully engaged in executing Phase II. Looking forward, our priority is to leverage the robust operating model we built through higher sustainable growth. We see a number of opportunities to do this. In Bio-Analytical Measurement we're focusing on opportunities in Life Science, lab informatics and mass spec. In Electronic Measurement we're focusing on the aerospace defense market, communications and general purpose instruments, with particular focus on low cost instruments. We'll provide more detail about these growth initiatives at the upcoming December analyst meeting.

For the First Quarter of FY '07, we expect revenue of $1.25 to $1.29 billion, up 7% to 10% from last year. We anticipate adjusted net income in the range of $0.36 to $0.40 per share, 24% to 38% above last year's comparable earnings. This validates the operating leverage we expect to achieve as we move through the remainder of the year. Thanks for being on the call today. Now I'll turn it over to Adrian.

Thank you, Bill. Good morning, everybody. Let me give you a few overall perspectives on the quarter for Agilent, review the performance of our two business segments and conclude with some thoughts about first quarter and full-year 2007 guidance. Except where specifically noted all of my comments will focus on Agilent's results from continuing operations; that is, ignoring the results of Verigy, which we distributed to our owners on October 31st. Verigy's results will be covered by its management in an earnings release and conference call later today.

Turning to the Agilent enterprise level, overall, we had a good fourth quarter. Orders of $1.4 billion were 7% ahead of last year. Revenues of $1.33 billion were up 6% from last year. Adjusted net earnings per share at $0.46 were about at our expectation, but probably $0.01 lower than they could have been because of weak incrementals on additional volume. This is reflected in our gross margin -- gross margins, which were up two points from last year, but about flat with the third quarter. However, discretionary operating expenses remained under very good control. Inventories remained below 100 days on hand, return on invested capital hit a new Company high of 29%, and we generated generated $300 million of cash from operations during the quarter. Overall, the transformation of Agilent that we announced 15 months ago is now complete. And the operating model we've built should be both much more stable on the top line and significantly cash flow positive on the bottom line, regardless of the economic environment. Today, as the world's premier measurement company, we're focused on leveraging through higher sustainable growth, the robust operating model we've built.

Okay, turning to the overall numbers. As I said we had orders of $1.4 billion, up 7% from last year. Turning to revenues, we had revenues of $1.33 billion, up 6% from last year. And looking geographically: In the Americas we had revenues of about about $515 million, up 3%; Europe was up a strong 12% to $319 million; and Asia Pacific was up 6% at $491 million. Currency overall had little impact on our top line comparison, less than 1%, but for the first time in memory, it did have an impact on our bottom line. Specifically, the weakening of the yen since last year hit our operating profits by about $8 million or nearly $0.015 per share because our Electronic Measurement revenues in Japan are largely in yen, while our costs are mostly denominated in dollars, and we were not fully hedged during the quarter. Even so, gross margins were very near the highest levels on record. Fourth quarter gross margins overall were 56.2%, up two points from last year and down three-tenths of a point from the third quarter. Electronic Measurement gross margins at 56.5% were up 1.5 points from last year and off 1.5 points from the third quarter, whereas Bio-Analytical margin,s at 54.8%, were up over three points from last year and up over a point in the third quarter.

Turning to operating expenses, as reported, they are up 7 % from last year and flat with the third quarter. Looking at year-to-year comparison -- when you're looking at year-to-year comparison, please remember that at mid year, fiscal 2006, we refunctionalized some general corporate expenses out of COGS and into operating expense, consistent with the new Agilent as a less manufacturing-intensive Company. Now, that artificially boosted gross margins and operating expenses by about about $11 million year-to-year. In addition, Agilent's variable pay program, which pays nearly every Agilent employee a 10% annualized bonus when Agilent hits its 21% ROIC operating model, had a larger pay out, as we hit a new Company high of 29% in the fourth quarter. That increased operating expenses by $9 million year-to-year.

Adjusting for both of these items, one simply a shift from COGS to operating expenses but with no bottom line impact, and the other real but varying systematically with our profitability, total operating expenses were up 3% year-to-year rather than the reported 7%. As reported, we had R&D in the fourth quarter at $149 million, up 3% from last year or 11.2% of revenues. SG&A expenses were were $367 million, up 9% from last year, 27.7% of revenues. Total operating expenses expenses $516 million, up 7% as reported, up 3 % after adjusting for refunctionalization and variable pay. Operating profits in the fourth quarter at $229 million were up 17% from last year. Our operating margin at 17.3% reached a new Company high during the quarter.

Turning now to the reconciliation between operating earnings to GAAP results, we had about $23 million of other income during the quarter compared to $16 million one-year ago. Our pro forma tax rate was unchanged at 25%, resulting in $191 million of pro forma net income or $0.46 cents per share, nearly 60% above last year's $0.29 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 $47 million related principally to the spinoff of Verigy and the restructuring -- reduction of Agilent's infrastructure costs, as well as 21 million of non-cash stock compensation expenses. Other miscellaneous items, including the benefit of a lower GAAP tax rate represents income of $9 million. The net result is third quarter GAAP net income from continuing operations of $132 million or $0.32 per diluted share compared to a $22 million GAAP loss in last year's fourth quarter. Total GAAP income in the quarter, including discontinued, was $152 million or $0.36 per share compared to $25 million or $0.05 per share one year ago.

Okay, turning to cash. We have already mentioned the good working capital performance, with inventory days on hand at 98, equal to last year and receivable day sales outstanding at 47, two days below last year. During the quarter we had depreciation and amortization of about $46 million, essentially offsetting $50 million of CapEx, and and $254 million of free cash flow from operations, after that capital spending. Overall, we -- after giving $300 million of cash to Verigy, we ended up with $2.3 billion of cash in short-term investments on the balance sheet. And as you know, during the fourth quarter, we announced a new $2 billion share repurchase program, which you should assume will be completed rateably over the next two years.

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 maintained its second half momentum, with fourth quarter orders of $462 million, up 15% from last year following the third quarter's 11% rise. This above-market growth was aided by continued strengthen demand for our recently introduced products such as our 1200 series LPLC, ACGH arrays and high density arrays. Geographically we saw strength in revenues from Europe and Asia, particularly from India and China. Record revenues of $418 million were 9% above one year ago and the segments book-to-bill ratio reached 1.11 during the quarter, about as high as it has ever been.

Life Sciences revenues were up 12% year-to-year at $182 million, with particular strength in India and China. We believe we are now seeing a rebound in large pharma spending as well as sustained strength from both CRO's, that is contract research organizations, and generic pharma. We're also seeing broad and rapid acceptance of our new 1200 Rapid Resolution Liquid Chromatographs and our new LC columns. In the academic and government market, we're seeing well-funded research programs outside the U.S, notably in European research funding, and in China, where they are raising both their biotech and proteomics research budgets significantly.

Chemical Analysis revenues of $236 million were up 8% over last year, with particular strength in Eastern Europe and Asia due to new regulations related to food safety and the environment; that is water safety and air quality. In addition, state and local governments in the Americas continue to spend on forensic applications, offset by lower U.S. government spending, as dollars have been redirected to defense. For the quarter, operating profits of $83 million were up $18 million from last year, for a very attractive 50% incremental. Gross margins were up over three points from last year, as were operating margins to a new high of 20%. Fourth quarter ROIC of 35% was about unchanged from last year, largely due to the impact of the Yokogawa Analytical Systems buyout, which we completed earlier in the year.

Turning to Electronic Measurement segment, fourth quarter orders were up 4% from last year to $935 million. Revenues were up 5% year-to-year to $909 million. As Bill mentioned, we saw good growth in several key markets, including wireless R&D test, semiconductor design and verification, and consumer electronics. However, we had a tough compare with last year's very strong wireless handset manufacturing test market and we lost some share in our OSS business. Geographically we saw strength in the Americas and Japan, while Asia-Pacific's revenue was up modestly and Europe was relatively flat year-over-year. General purpose test revenue was about $544 million or 60% of segment revenues. There we continued to gain share in our core products, such as oscilloscopes. We also launched our low-cost handheld product line, creating a new segment for Agilent. And we are growing our presence with indirect channels, that is distributors and system integrators. In aerospace and defense, demand in the U.S. is strong for surveillance programs, in particular. In the semiconductor and computing market we are seeing strong growth in products that target high-speed digital measurements. High-end scopes posted especially strong results for the quarter, while our mid-range scopes saw renewed strength, particularly at the competitive 1.4-gigahertz range.

Communication test revenues were at $365 million during the quarter, or about 40% of segment revenues. Here we saw a steady growth in wireless R&D test, driven by continued investment and next-generation technologies aimed at delivering voice, video, data and audio services to consumers. The R&D effort to integrate these services is significant; one example being WiMEX, a high profile technology with very significant investment in R&D by our customer base. Wireless manufacturing test expansion continues to be driven by China, India, and Eastern Europe. This business is still the biggest segment of wireless manufacturing, but as I said earlier, we had a very tough compare with last year's booming levels. Overall the wireline business remains soft, as the communications equipment cycle continues down in the U.S, Japan, and Western Europe, exacerbated by industry consolidations. Future growth here is expected to be fueled by triple play services deployment, ten gig ethernet upgrades, and the convergence of networks towards IP-based multi-service technologies. Segment gross margins in the quarter were up 1.5 points from last year, but off a similar amount from the third quarter. Operating margins of 16% were up a point from last year and were a point higher than the third quarter, despite the weaker gross margin. Return on invested capital improved two points from last year to 28%.

Okay, finally looking at guidance, we remain vigilant about the overall economic environment and we are moderating our spending accordingly. But, we enter 2007 with momentum and the strongest backlog in a half decade. Our first quarter guidance is revenues of $1.25 billion to $1.29 billion, up 7% to10% from last year and adjusted earnings per share of $0.36 to $0.40 per share, up 24% to 38% from last year. Notice that we've tightened our guidance range just a bit. This is due to the fact that, with the semiconductor related businesses now divested, Agilent has not only increased its secular growth rate by about a point to 6%, but we have also reduced the average volatility around that secular trend by roughly two-thirds. You will hear more about our full-year 2007 guidance in some detail at our annual analyst day on December 12th. For now, however, we can say that we're comfortable with the range of analyst forecast for the full year.

And with that, let me turn it back to Hilliard.

Thanks, Adrian. Danelle, I'd like for you to go ahead and give instructions for the Q & A.

Thank you, sir. [OPERATOR INSTRUCTIONS] And your first question will come from the line of Ajit Pai with Thomas Weisel Partners. Please proceed.

Hi, good morning.

Good morning.

A couple of quick questions. The first one is just looking at the gross margins in the Electronic Measurement side. Even though you had a $61 million sequential increase in revenues, you had the gross margins decline sequentially. Could you give me color as to why that happened and also whether part of it is due to the new low-end tools or handheld products that have been introduced in the distribution channel that you've introduced?

The -- overall the reason for the decline was product mix. We had a little bit less of our wireless business, which tends to have higher gross margins. And the second reason, of course, is the currency impact that Adrian had talked about in Japan. Our business in Japan was the strongest of all of the countries in Asia, so it was just an artifact of mix and currency and nothing too fundamentally with the introduction of low-cost instruments or overall pricing pressure.

Right, and so is it fair to say that the sort of low-cost instrumentation that you're introducing in handheld products, as well as using additional distribution channels will be neutral to gross margins going forward for this segment?

No, I would -- Ajit, this is Adrian. I would say that overall the gross margins are slightly lower on those handheld products, but so are the operating expenses and support and so, on an operating profit basis -- or an operating margin basis, we see really no difference.

Right. So your target gross margins for the Electronic Measurement Group would be what? About let's say 12 to18 months out?

Well, if they're significantly different than they are today on a targeted basis I'd be surprised.

Okay. And then the second question --

I just want to make it clear there's no impact to Q4 gross margins due to the launch of our low-cost instrumentation.

Got it. Yes, the second question is, you know, you did talk about difficult compares for your wireless handset test on the manufacturing side, but could you give us some color as to how much the orders were down in the year-over-year basis?

For year-over-year in the wireless test business, our revenue was down $10 million, which is approximately 1% of growth. Likewise on our OSS business, or monitoring business, that was down roughly $18 million or two points of growth. So if you just assume that those two product lines were flat, we would have had three points of additional growth. The wireless test business is just the artifact and the noise level, in my opinion, of investment of manufacturing going to this holiday season. The OSS difference is real and as you know, we have reorganized that team. We have refocused that team and are quite excited about the opportunities we see, as we move forward into 2007.

Okay, thank you so much.

Your next question will come from the line of Deane Dray with Goldman Sachs. Please proceed.

Good morning, this is Mark Zeff calling on behalf of Deane.

Good morning.

I wanted to follow-up on the comments, both in the press release and in the prepared remarks, about being vigilant of economic uncertainties over the next year. Are there any end markets in which you're currently seeing moderating growth or incremental softness and when you're looking at your end markets into Q1 and 2007, what the are the key puts and takes as far as increasing strength or moderating growth?

I think both of us will have comments on this. Based on the order performance going into FY '07, you know there is not any measurable weakness anywhere in the world. We obviously have concern about the U.S. economy and the potential slowdown for capital spending in the U.S. in general. Again, that's particularly on the manufacturing side. What we continue to see, though, is increased investment on the research and development side, particularly in Europe -- again we had strong Europe to U.S. -- and of course in Asia. And half of the Measurement -- and over half of the Measurement market is in the research and development. So again, there is no visible signs of a fundamental slowdown in '07 based on our performance. And as Adrian said, though, we are monitoring that on a -- literally a daily and weekly basis.

Yes, and I would only reinforce the message that, remember, this is a rebalanced Company today with about 40% of our revenues in the U.S,, but that being much more research-oriented than consumer electronics-oriented or semi-oriented the way it used to be. 36% of our business is in Asia, where we're benefiting on both sides of the house from the strength and infrastructure spending, and 24% in Europe where growth continues to be pretty steady. So, you know, where would we look for it? Of course we'd always look for it in the semiconductor-related businesses first, as a leading indicator for some of our other businesses, particularly in the Electronic Measurements side. And while there have been some signs of topping or slowing there, again, reinforce what Bill said. So far, we've seen no signs of it in our business or our backlogs whatsoever. And indeed we enter 2007 with the strongest backlogs in a half decade.

That's very helpful. And one quick follow-up on the wireless manufacturing market. Although orders were down off a tough comp, you're still seeing solid underlying demand in that market?

Absolutely.

Absolutely. And again wireless manufacturing in the quarter is only 10% of the Company's business. Again, real tough compared to last year. But as we shared in the last quarter's call, our wireless manufacturing is 10% of the total Company and again, just had a very strong quarter in our general purpose instrumentation.

Great. Thank you very much.

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

Hi. I was wondering if you could talk a little bit about Integrated Biology? I know that was an area where the goal had been to get it to profitability by the end of the year. Wanted to get an update on how that's progressing.

Well, we continue to progress well. I wish I could say that we got fully to profitability, but we made a dramatic improvement in the quarter. One of the biggest drivers was the launch of our high-end mass spec products. The market acceptance has been very, very good and in fact, we're shipping as fast as we can manufacture the new mass specs. Secondly, we've introduced a few quarters ago, our high-density micro arrays and that is being well received in the market and, fortunately, carries a higher average price. So the momentum that we saw in Q4 on the Integrated Biology was quite good and I think we're very well positioned moving into FY '07.

Okay. And then secondly, can you talk a little bit more about the market share dynamics that you'd talked about in OSS, sort of what went on there and how you think you can change that around?

Fundamental as compared to last year is that we had a very strong quarter in Q2 and what would be Q2 -- or excuse me, Q4 of last year would be in the whole G2 wireless network business. And as you know, the migration has been to wire -- to G3 and we have lost market share in that space. So the new team that we have is, again, sizing ourselves for the business available and really targeting where we can make contributions moving forward. So again, I'm quite confident that we will see continued progress in this area after a tough year moving into '07.

Okay, great.

I have to say -- it's Adrian, I would just reinforce that last year at this time that compares were particularly tough because we had the E-911 initiative take place, which was a bit of a wind fall for our existing business, but that ended in the fourth quarter of last year. So year-to-year that's part of the reason we were down quite so much. Going forward we see the business beginning to turnaround and beginning to grow.

Great. Thank you.

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

Hi. Good morning.

Good morning.

Just a couple quick questions, please. First of all, your handheld instruments, I realize it's early in the game but how did the new products perform relative to your expectations?

Well, we've been very happy with the acceptance of our handheld products and our movement into the distribution channel. In fact, in various distributors in various parts of the world we will be already number two in electronic distribution and soon we'll be number one, so the initial response has been quite favorable and this is just the beginning. By the end of next year we will have a full family of low-cost instruments available through indirect channels.

By the way, if you come to our analyst meeting in December , you'll get an opportunity to see these new instruments.

So, there are more coming of the handheld? There's a multi-meter of oscilloscopes?

Absolutely. In fact we just announced a low-cost spectrum analyzer. We will have a full family of low-cost instruments to be able to compete in this $800 million segment of the market.

Thank you. And then the second question, you recently announced some oscilloscopes that had LXI interfaces that you called synthetic instruments. Are these the type of things that you're targeting for the U.S. Military and when do you really see the peak buying to occur?

Yes, the synthetic instrumentation is a program headed by the pentagon to redefine test and measurement for military applications. The last time the recapitalization of instrumentation in the military happened was under the Reagan administration, so we believe this will be at least $0.5 billion to $700 million opportunity over the next ten years right now. And some of the capital investment has been limited, given the use of funds in other parts Department of Defense, but we're very excited about the opportunity that we have. We have the broadest line of products that are compliant to -- for synthetic instrumentation in our LXI initiative, and we also believe that this technology will be able to be commercialized outside of aerospace and defense applications.

Okay, thank you very much.

Your next question comes from the line of Robert Eastman with Robert W. Baird. Please proceed.

Bill, just a follow-up to that question. Is that -- do you feel that the aero - the mil-aero marketplace is maybe slow to place orders or is any of the softness that we're seeing in the last few quarters related to this synthetic initiative?

I think the overall market has slowed, mostly having to do with the allocation of resources at the Department of Defense. However, in the surveillance area, both in Asia and the Americas, it's dominated by the U.S., obviously, and we actually did see some growth. Actually, the biggest decline in aerospace was in Europe

In Europe? Okay.

Yes.

Okay. And then a second question, on the band business the order growth was very impressive. We built some backlog there. Are there any production slowdowns or issues there or is it basically the timing of orders?

Well, in terms of our new high-end mass spec triple quad timer flight, I wish we could double the capacity overnight. Demand has been very, very robust and the team back in Delaware is ramping production as fast as we can. So that is the biggest opportunity to shift more product in our high-end mass spec.

Okay. So then basically we built backlog somewhat unintentionally?

Well --

No. It wasn't unintentional. The orders were greater than what we expected and it's a good problem to have.

Okay, all right. And then lastly, the incremental margin on the EM side of the business. I think Adrian, you touched on this. This was basically currency and then product mix also affected the incremental op margin -- profit margin?

Yes, exactly and it was just the gross margin more than the ops margin but that is the main element, mix and currency.

Okay, great. Thank you.

[OPERATOR INSTRUCTIONS] Your next question will come from the line of William Stein with Credit Suisse. Please proceed.

Thank you. I'm wondering if you could address the long-term operating model? I think you guys set that perhaps a couple years ago before you spun out the semiconductor-related businesses. And right now on the operating line, you're performing well above the mid point, closer to the peak targets for that operating structure. I'm wondering if it might be time to update that view?

Well, we will surely update it for you in the December 12th analyst call, as we move forward. And you're right, the existing operating model that we have published now for a couple years needs to have the distribution narrowed and the mean shifted.

Okay. Thanks. And also then on the growth rate, I think you guys have been pretty vocal talking about 6% market, 2% from gains and 2% from acquisitions. I'd love to hear you comment on how you might see that progressing through next year and also particularly on the acquisition side. I know you guys closed what I expect is a very small deal yesterday. I'm wondering if you can comment on the acquisition pipeline and strategy around that? Thank you.

Sure. We have said that based on the growth initiatives that we have identified and again, we're essentially and historically have been an organic growth Company. But we have supplemented our organic growth through what I call bolt-on technology acquisitions. And if we do those successfully, both the growth initiatives I outlined in my opening remarks as well as integrating and capturing the value of the acquisitions that we have been making, we believe that we can grow at the 10%. And so the guidance we gave moving forward is 7% to 10%, which is the range of probability of us moving forward. But clearly, our internal goals and our focus is to be able to grow at 10 %. The acquisition that we made yesterday with the team in Switzerland is just an example of a team that provides solutions -- digitized solutions to both the analytical markets as well as the electronic markets, and this is just going to be a great addition to our product portfolio, particularly in the whole synthetic instrumentation and aerospace and defense market. And so on December 12th, when we have our yearly analyst meeting, both Pat Burn, who manages our Electronic Measurement, and Chris van Ingen, who manages our Life Science and Chemical Analysis, will really detail the growth initiatives that we have to out pace the market. That is really the story of Agilent in phase two is how do we leverage this great operating model we have created to have above-market growth rates.

And, William, I would suggest that for modeling purposes you look at the last two years. We've averaged between $50 and $150 million per year in these types of fold-in acquisitions. And I think with our ability now to focus exclusively on the customers and the new products that you'll see something in that sort of $100 to $150 million per year fold-in's going forward, which represents the two percentage incremental growth you were talking about.

Thank you very much.

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

The handset weakness, do you expect that just to be a seasonal issue and then pick up in the first quarter?

Well, typically Q4 is really quite strong in preparation for the holidays, and this is just a relationship to the amount of capital that is in place to support the existing build moving forward. There has been some shift geographically, as some suppliers have taken market share versus suppliers that have lost market share. And as I have mentioned in the past, this is a huge market, billions -- a billion cell phones manufactured, and each of the top six players that have 80% of the market all make capital bets on what percentage of the market that they are going to take. And of course, as space and customer acceptance you're going to get some movement there. So I would not read anything into our drop of $10 million based on anything fundamentally that we're doing or anything fundamentally different in the marketplace.

But Mark -- this is Adrian. To answer your question, I think, again, we had a very tough compare year-to-year in the fourth quarter. We will not have as tough a compare in first quarter to first quarter. so I think. again. for your modeling purposes, you can assume that we'll be getting closer back to trend in the first half of '07.

Then just a quick detail. [inaudible]. Can you give us some idea of the option expense in the quarter just reported?

$21 million

Okay, thank you.

It will be in Table five of our tables.

And there are no more questions in the queue. I would now like to turn the call back over to Mr. Hilliard Terry for closing remarks.

Thank you, Danelle, and thank you to everyone for joining us. We look forward to seeing everyone here on the 12th for our analyst meeting. Again, thank you very much.

Ladies and gentlemen, this concludes your presentation. You may now disconnect and have a great day.