安捷倫 (A) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 Agilent Technologies earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn our presentation over to your host for today's call, Mr. Rodney Gonsalves, Director Investor Relations, please proceed, sir.

Thank you, and welcome to Agilent's first quarter conference call for FY 2007. 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. 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 onto the Webcast module from our Website, you can click on the link for Supplemental Information. You will find additional information such as our end market revenue breakout and historical financial information for Agilent's continuing operations.

In accordance with SEC Regulation G, if during this conference call we use any non-GAAP financial measure, you will find on our Website, the required reconciliation to the most directly comparable GAAP financial measures. 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 results to differ materially from management's current expectations.

We encourage you to look at the Company's most recent filings with the SEC to get a more complete picture of all the factors at work. Forward-looking statements, including guidance, provided during today's call are only valid as of this date and the Company assumes no obligation to update such statements as we move through current quarter.

Lastly, before I turn the call over to Bill, I'd like to remind you that we will host our Electronic Measurements Investor Forum on Thursday, March 8, 2007, at the Palace Hotel in New York. The Investor Forum is a follow-on to our December annual analyst meeting and will provide a deeper dive into our electronic measurement business and our major growth initiatives. Executives from the electronic measurement group will be presenting and available for your Q&A. Now, I'd like to turn the call over to Bill for his comments.

Thanks, Rodney. Hello, everyone, Q1 represented the start of phase two of Agilent's Company strategy as we begin to leverage the strength of the operating model that we have created through higher sustainable profitable growth. Orders are up 6% over last year, while revenue increased by 10%. Operating margins reached 14% and return on invested capital was 23%. Turning to our results by business. Our bioanalytical measurement business delivered solid financial results. Year-over-year revenue growth of 22% outpaced all competitors and set a record high for the business. We saw a strength in both our chemical analysis and life science business units, as well as solid performance across all geographies.

Life science revenue was up 23%. We continue to see increased demand for rapid resolution LC's, mass specs, microarrays and informatc tools. These are the areas we have specifically targeted with growth initiatives. LCMS quarterly revenues were more than double a year ago. In addition, pharmaceutical spending has improved modestly with the strength of Q1 revenues due to customer financial year-end cycles. Typical analysis revenues were up 21% from last year.

We continue to see excellent acceptance of our new products, including the HPLC 1200 series our triple quad mass spec. A strong performance was in petrochemical, food and environmental testing particularly in Asia where we're experiencing outstanding year-over-year growth. Going forward, we'll continue to focus our bioanalytical R&D investments on expanding our portfolio, improving customer work flow requirements, and providing full application solutions to our customers' needs.

Turning to the other side of the house. Our electronic measurement business saw 4% revenue growth over the last year with weakness concentrated in the wireless manufacturing tests in Asia. Excluding the impact of the weak handset test market, electronic measurement segment revenue grew about 9%. General purpose test growth of 11% was driven by ongoing global economic expansion and rising spending in R&D and consumer electronics. We're gaining momentum with our new family of spectrum analyzers and signal sources, expanding our basic instrument product offering and we continue to do well in oscilloscopes.

The communication test business was down 6% from a year ago, reflecting the weakness in the handset test market in Asia. Our strategic focus on wireless R&D continues where we see ongoing investment activities. We have just launched what we believe is the most comprehensive WiMAX test solution in the industry. Overall, there's a noted geographical shift in our electronic measurement business. Americas and Europe did well, while Asia declined.

In the Americas and Europe, we demonstrated broad, basic broad-based geographic growth in smaller companies focusing on wireless, signal integrity and other R&D applications such as triple-play. This growth was very evident in our distribution channel where we saw dramatic growth. We are targeting to be number one and number two in distribution by the end of the year. Only two years after our indirect channel was created.

At a Company level, we expect the relative performance of our business segments to be repeated in the current quarter and to see improved momentum in electronic measurement during the second half of the fiscal year. For the second quarter of FY '07 we expect revenue of $1.3 billion to $1.34 billion, up 5% to 8% from last year. We anticipate adjusted net income to be in the range of $0.41 to $0.45 per share, 14% to 25% above last year's comparable earnings. 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 two business segments and conclude with some thoughts about second quarter and full year 2007 guidance. Overall, we're pleased with our first quarter performance. We saw weakness in handset manufacturing tests that we did not fully anticipate but we also saw some strength elsewhere in electronic measurement. And we had a blowout first quarter performance from our bioanalytical segment.

Overall, revenues and earnings met our expectations. With revenues of $1.28 billion, up 10% and near the top of our $1.25 to $1.29 billion range of expectations. Adjusted net earnings per share at $0.39 were also near the top of our $0.36 to $0.40 range and up 34% from one year ago. In addition to bringing $0.31 of every incremental revenue dollar to the bottom line, we improved receivables DSO's by three days and inventory, DOH, by five days, resulting in a 23% return on invested capital.

Cash generation from operations was $93 million during this seasonally weak quarter. We invested $70 million of cash in fold-in acquisitions during the quarter, as well as repurchasing $254 million of stock. In short, during the first quarter we demonstrated our strategic intent to leverage through higher sustainable, the robust operating model that we've built.

Okay. Turning to the overall numbers, we had orders of $1.25 billion, up 6% year to year. With bioanalytical orders up 15% and electronic measurement orders up 2%. First quarter revenues of $1.28 billion were 10% above last year, with about 3 points of that growth due to currency. In the Americas, growth was 7% first quarter to first quarter. Europe was up 17% in part because of currency. And Asia-Pacific was up 7%, for an overall increase in revenues of 10%.

Currency had an equivalent impact on expenses so we had no material impact on our bottom line from currency. Gross margins at 55.5% were the highest first quarter margins on record and up 1.6 points from last year. However, 1.2 points of that improvement in reported margins was due to a shift of expenses out of cost of sales and into operating expenses to more accurately reflect where costs are occurring in the new Agilent.

We've been talking about this refunctionalization of expenses for three quarters now since we made the change in mid fiscal year '06, so one more quarter to go. But on an apples to apples basis, gross margins were up about 0.5 point from last year's first quarter. Similarly, looking at operating expenses, they are up 10% from last year as reported or $46 million.

Backing out the $15 million of refunctionalized expenses from the cost of sales, $14 million from the impact of a weaker dollar and $5 million of higher variable pay from hitting our 23% return on invested capital; Actual discretionary operating expenses were up only $12 million from last year or only 2% year to year. As reported, R&D was $159 million in the quarter or 12.4% of sales, down 0.2 from last year. SG&A at $368 million was 28.8% of revenues, or up 0.2 point from last year.

The Company's operating margin at 14.3%, was up 1.6 points from last year's first quarter. Order of magnitude, about 3/4 of that improvement was due to leveraging operating costs and about 1/4 of that improvement was from leveraging gross margins. So we had operating profits of $183 million during the quarter, up 24% from last year. An operating margin of 14.3%, up 1.6 points.

Going down the income statement, we had other income of $28 million, for pretax profits of $211 million. We had $48 million of taxes, which was a tax rate of 23%. Giving us net income of $162 million or $0.39 per share, compared to $0.29 per share one year ago. As an aside, with the R&D tax credit now a reality, we expect that our non-GAAP tax rate will be 23% for full-year 2007.

Table four of our press release financial tables provides a detailed reconciliation from GAAP to GAAP income. There you will see pro format net income of $162 million, restructuring expenses of about $15 million, equity-based compensation of $36 million, other noncash amortization of $17 million, a one-time donation to the Agilent Foundation of $20 million and then a tax benefit of $76 million; To get to GAAP income from continuing operations before equity income of $150 million or $0.36 per share. That compares to $0.15 per share one year ago.

Note that the year to year increase in equity-based compensation expense had nothing to do with a change in our programs. We simply renewed our employee stock purchase plan or ESPP on the same terms and the accounting rules mandate that we front load the amortization of the renewed two-year program. The impact of this accelerated amortization was a $6 million increase in the first quarter expense compared to one year ago, a pattern that will be repeated through the this year. Next year, with over 3/4 of the plant's cost already having been expensed in '07, the pattern will reverse.

You will also notice that we had a negative GAAP tax rate during the first quarter. The result of the reversal of a $50 million reserve on a potential foreign tax exposure where the statute of limitations has now run out. Unless we have additional discrete events like this, we expect our GAAP tax rate for the remainder of the year to average around 18%.

Turning to cash, I've already mentioned the good working capital performance, with inventory days on hand at 102, five days better than last year. And receivables days sales outstanding at 47, three days below last year. Total cash from operations were positive $93 million compared to consumption of $104 million last year at this time. Capital spending was about $37 million, compared to depreciation and amortization of $46 million.

We had cash acquisitions of $70 million in the quarter. We repurchased $254 million of shares but we also had share issuances of $85 million, for net repurchases of $169 million. That $169 million ties pretty closely to the total change in cash and investments on the balance sheet, which is down $172 million from the end of last year, to $2.09 billion.

Okay. Bill has already given you some color commentary on segment results but let me give you the numbers and a few more details. Our bioanalytical segment had a blowout first quarter, with new records for revenues, revenue growth and operating profits. Orders at $433 million grew at a double digit rate for the third consecutive quarter, with a 14% first quarter increase following last year's 15% fourth quarter rise.

Revenues at $455 million were up 22% from last year. We saw strength in both life sciences and chemical analysis and solid performance across all geographies. Asia-Pacific was particularly strong, with China revenues up 34% from last year and India up 38%.

Note that our book-to-bill ratio was below 1.0 for the first time in three years in this segment. But that is certainly not a sign of weakness. It reflects the fact that we were finally able to begin to work off some of the record fourth quarter backlog during this quarter.

Life sciences revenues of $195 million was up 23% year to year. Revenue growth was driven by the continued success of our new 1200 series lC platform, particularly the rapid resolution system, HPLC columns and our expanded LCMS portfolio. That is the single quad, triple quad, and the quadrupole time-of-flight. From a market perspective, we saw good demand from large pharma and biotech for fast LC's, mass specs, microarrays and informatics tools.

We are also seeing sustained growth of CRO's and generic pharma in China and India, and increased research spending in those countries, as well as in Korea and in Singapore. Chemical analysis revenues of $260 million were up 21% year to year. Here, too, we saw strong revenue growth related to our new 1200 series lC platform. Again, the rapid resolution system, HPLC columns and the new triple quad LCMS that's used in chemical analysis applications.

From a geographic standpoint, we continue to see strength in Europe and in Asia. China in particular has raised investments in petrochemical, environmental and safety management sectors. In fact, petrochemical is the strongest segment in Q1 up 32% year to year due to still-high oil prices, system replacements in the Americas and Europe, construction of new refineries in India and China and worldwide demand for alternative fuels such as biodiesel.

Food testing was also strong, up 20% year to year, driven by updated food safety regulations in China and India. In fact, increasing regulatory standards continues to drive worldwide demand for testing. Local environmental regulations continue to drive testing of drinking water, solid waste testing and air monitoring, once again led bY China and India.

Okay. Operating profit in the chemical -- in the bioanalytical segment was $88 million, up 69% from last year. Operating margins, 19.3%, up over 5 points from last year. In fact, this segment dropped $0.44 for every additional incremental dollar to the bottom line. Return on invested capital at 36% was up 8 points from last year.

Turning to electronic measurement, first quarter electronic measurement orders of $817 million were 2% of last year, with weakness concentrated in wireless manufacturing tests. Revenues of $825 million were up 4% and the weakness in handset test is reflected in the geographic distribution of growth with the Americas up 6%, Europe up 12%, while Asia was off 1% from last year. As Bill mentioned, if you exclude handset test, segment revenues were up about 9% from one year ago.

General purpose test revenues of $509 million were up 11% from last year. Demand was strong for consumer electronics and business in the computer semi and nanotech space was up 11% from last year. Our real-time oscilloscopes continue to see strong demand from these customers.

Turning to aerospace defense, we are seeing short-term test and measurement spending pressure, as funds continue to be diverted to war-related expenses. However, we are seeing strength in spending related to signal intelligence, communications and surveillance and we expect that to continue. Our PSA-based measuring receiver has now been adopted by all U.S. military customers and we're now leveraging that success with the primes and their food chain.

Finally, our recent launches of low-cost instruments, including both bench top and handheld offerings have been very well received, both in price competitive markets such as China and in distribution channels across the globe, including the U.S. Communications test revenue of $316 million was down 6% from one year ago. We are seeing significant weakness in the wireless handset manufacturing test market. This is due to slowing handset growth, some excess capacity and a bifurcation in the market where most of the strength is in the low-end handsets with minimal test requirements. We don't see this market weakening further but we are not anticipating a rebound before this year's second half.

Wireless R&D, by contrast, has shown steady mid single digit growth as NEM's focus on integrated devices for voice, data and video services. We're seeing the strongest spending on high data rate applications for wideband CDMA, HSDPA and HSUPA . technologies, as well as 1xEV-DO. And WiMAX also continues to be a high profile technology in the mobile wireless market and where we are actively participating. Operating profits in the segment were $95 million during the first quarter, up 7% from last year. Operating margins were up 0.3, to 11.5% and ROIC was up less than 1 point to 19% return on invested capital.

Finally, turning to guidance. As Bill suggested, we expect the first quarter pattern of relative strength to be repeated in the second quarter, although perhaps not quite to the extremes we saw in Q1. We also of a new guest chromatograph platform and an enhanced GCMS launching later in the second quarter. That may slow bioanalytical a bit in Q2, but it would also boost our second half growth as we begin deliveries on this new platform.

Our second quarter guidance is revenues of $1.3 to $1.34 billion, up 5% to 8% from last year. Pro forma earnings per share, $0.41 to $0.45 per share, up 14% to 25% from last year. And beyond the second quarter, we remain comfortable with the range of analysts' estimates for the full fiscal year 2007. With that, let me turn it back to Rodney.

Thanks, Adrian. Cheryl, please go ahead and give instructions for the Q&A.

[OPERATOR INSTRUCTIONS] Our first question is from the line of Mark Moskowitz of JPMorgan.

Thank you. A couple questions, if I may. Adrian or Bill, can you just kind of give us a little, a better characterization in terms of what you're seeing that gives you confidence in the second half snapback for electronic measurements? And I say that given that the orders -- your order trends and your book-to-bill are starting to show signs of, at least in my view, some slowing. Does Agilent have opportunities with new customers or new product programs that may counter some of the prevailing trends?

The fundamental change in electronic measurement, as Adrian said, took us somewhat by surprise. There was a dramatic slowdown in investment in cell phone manufacturing in Asia. And it is across the board. We're seeing consolidation in tier two, tier three suppliers, as well as a dramatic slow down in capital investment moving forward. And so it is very isolated to one part of the industry. I was actually there myself during the quarter. And other than that, the rest of the region, which is driven by manufacturing, is still relatively robust. So coupling that with our continued focus on the R&D market, of which we continue to make progress, continued focus in aerospace and defense, focusing on fixing and expanding our monitoring business and of course our launch of our low-cost instrument businesses; We feel like that we will continue to see momentum in our growth objectives that we have set out. And as we said, we are not planning for a dramatic increase at all in cell phone manufacturing in the year.

Mark, I'd just add that cyclically, this business, the handset test business, that is, does lurch around quite a bit. It tens to be hot or dead. And it's dead at the moment at a level that seems below what is sustainable, given the level of production of handsets. So, these adjustments tend to take about six months for it to absorb the excess capacity and then it will return to a norm. And year-over-year it may be flat but from the current low point, it could be up in the second half. That's basically what we're thinking about.

Given this small -- or this large decrease in cell phone manufacturing, I think the diversity of our measurement solutions across all of our industries, both in electronic measurement and analytical measurement, is a testament to the diversity of measurement solutions that we provide to a very diversified market. And we can take literally a 26%, 27% decrease in cell phone manufacturing and still turn in 10% year-over-year growth.

Okay. Thank you. And then as far as my second question, I want to shift gears to bioanalytical. Clearly, the operating margins continued to move upward toward the 20% threshold. When should we think of some of your newer businesses that have finally started to cross into profitable territory? When should we look for that, one, the added scale? And two, the incremental leverage from that playing out in the coming quarters to maybe go above 20%?

Again, we want to continue to leverage just a great operating model in bioanalytical to really accelerate our overall growth. And we were particularly pleased on, for example, our microarray business was up 56%, our informatics business was up 33%. We continued to well in service and supplies, as well as of course our core instrumentation as we mentioned, our LC -- our MS platform launches. So, we're really want to have the team continue to make investments to accelerate this growth and then as I mentioned, continue to expand our product offerings so we can provide for integrated solutions to our customers. So again, just by the sheer momentum of our revenue growth, you will see some incremental problems -- or profit improvement but again, we're committed to expand our product offering, which will obviously increase some of our investment as we go forward.

Thank you.

Our next question will be from the line of John Groberg of Merrill lynch. Apparently, John withdrew his name. One moment, please. Our next question will be from the line of Ajit Pai from the line of Thomas Weisel Partners.

A couple of quick questions. The first one is just a progress report on your OSS business. I think about for four quarters you had declines over there, has that business stabilized? What signs of spending are you seeing over there? And then also your initiative in low-cost instrumentation, what kind of sort of headway have you made over there? What's the early response in terms of distributors as well as your end-market appetite?

In terms of the OSS business, I think it's fair to say we're still in the process of stabilizing our business, focusing to ensure that what contribution that we make to the market is a profitable contribution. It is my belief there continues to be very substantial investments in this space, particularly with the rollout of Internet protocol networks, IPTV, as well as, of course, the cellular services and the potential for mobile WiMAX moving forward. So the businesses there, our task is to make sure we focus the organization where we can make contributions. So, I have very strong confidence that we're going to do better as we progress during the course of the year.

And has it been flat sequentially so far, the orders and the revenues for the past two quarters?

We are flat sequentially slightly down from last year.

Okay.

In terms of the handheld and again, we just launched the handset products over the last few quarters, the market acceptance has been very, very good. And as I had mentioned, we have moved into the indirect channels, being our classical electronic distribution channels and we are making enormous headway. And we believe we'll be number one or number two in distribution around the world by the end of the year. The total electronic distribution market is about $1 billion. Today, we have products that can address 50% that market or $0.5 billion. And on that segment of the addressable market, we are targeting to be number one.

Right. And then just looking at the share buybacks that did you during the quarter, I see $254 million is the number that was used for treasury stock repurchases. Could you give us the average price at which that was repurchased?

About $32.

Okay, $32. And then when you're looking at the overall electronic measurement business, the weakness that you've seen so far has been in one of your higher market position, higher margin businesses on the communications side. So is there any change in your sort of gross margin target for the electronic measurement business going forward?

Ajit, well first of all, I'll have Adrian talk about it from a financial standpoint. If we're successful with the launch of the new products as I had outlined, we continue to take additional market share in the R&D community, this should not be a substantive change in our gross margin.

That's absolutely right. And Ajit, if you look at the incrementals in electronic measurements, year-over-year, it was only 19%, but it's for exactly the reason you indicated. It's that one much our most profitable businesses from a gross margin perspective was the weakest. And if you look below the covers, you would see that the gross margins were in fact continue to be very attractive across the board. And we're getting lots of momentum, as Bill indicated earlier.

Okay. Thank you so much.

Our next question is from the line of Deane Dray of Goldman Sachs.

Thank you, good afternoon. A couple questions in the communication test side of the world. And just to circle back again on handset tests. And this may be stating the obvious but just wanted to hear from you Bill, whether this is not a question about losing any market share. It's all about the consolidation that this industry continues to to through, especially in China?

That is absolutely correct. We have no evidence at all of market share. And again, I was there during the quarter looking firsthand. This is adjustment after the holiday season in Q1. And it is more dramatic than we had expected.

Sure, and the number two player in that business, R&S, is still a long way behind Agilent in handset tests is that correct?

Well, that's our viewpoint.

Absolutely. And then one of the offsets and you talked about this in previous quarters, was the ability to ramp up your handset R&D. And you said you've done some spending there. Give us an update as to -- and really set expectations here, is when should we begin to see more traction on the R&D side? Because that will reduce your exposure on handset volume.

Actually, in this quarter I think we already saw that. You saw what our overall growth in the geographies that I mentioned, particularly in America and Europe, is really driven in this wireless R&D, WiMAX space, driven in a lot of the smaller companies. As you know, WiMAX is getting some enormous amount of attention moving forward. We have just made an announcement of what we believe is the most comprehensive test capability in the industry. And so, what you will see is this continued shift as a percentage of the business for wireless R&D. And just give you some numbers. In Q1 '07, our cell phone manufacturing test was 7% of the Company's total revenue, wireless R&D was 7% of the total Company.

Good. So when you refer to -- I think in your prepared remarks you talked about the EVDO, that would be included within the handset R&D side?

Well, overall R&D, again not to be confusing in my comments, I talked about both of segments inside of our electronic measuring group but then tried to explain why the geographical shift of growth from the U.S. and Europe. So, that was the sum of all activities. But our growth rate, even exclusive of the currency change in Europe, we saw very good growth in both the Americas, as well as in Europe across the board.

Great, and just moving away from wireless for a moment, if I'm not mistaken, I've seen a couple of higher profile fiberoptic component IPO's coming out. And really begin to feel -- to see more references to 40 gig, it feels like we're in a minioptical cycle again. And it's interesting that -- Agilent was a deep, deep player in this in the last cycle, which might have been 2000. What's your feeling about -- are we seeing a minicycle here and what's Agilent's opportunity?

We're clearly going to be prepared if there is continued strength in the wireline or in the optical space. We did see some positive growth in that area. One thing that in our particular case, will damper some of that is the continued consolidation in the NEM's. As you know, there's been a lot of consolidation in the industry. And given that we tend to be a very broad line supplier to those types of very large companies, I think the initial impact to us will be tempered from an outside in view. But clearly, there is more optical business there and we'll be prepared to address it.

Okay. We'll stay tuned on that. And then last question, for Adrian, we'd be remiss if we didn't come back to questions about use of cash. But I'll come at it this way. In the buybacks that you did in the quarter, you didn't buy back enough to offset share creep, if I'm looking at your diluted share count correctly. So, this begs the question, are you going to buy back enough to offset share creep? And then, at what point should we expect to see an acceleration, either a buyback or the initiation of dividend?

Dean, your observation is correct. Because of the fact that we had ESPP shares issued at the beginning of the year, because we had an adjustment to the volumation of Agilent options for the Verigy spend, because we did have a price change in the stock, those all offset what was $7.5 million of share repurchases during the quarter. I think it's always hard to see what share issuances are going to do. But order of magnitude, I think you should be assuming roughly a $5 million per quarter reduction in the average shares outstanding at a minimum. And that would be a $1 billion rate. We go -- Bill and I go to the Board, usually during the August/September time frame and talk about strategy, including capitalization strategy. So, you would expect, if anything's going to happen, that probably would be the next opportunity.

You don't see any reason further to put that cash to work in an earlier time frame?

We're not prepared to speculate on that at this point.

Okay. Thank you.

Our next question is from the line of John Groberg of Merrill lynch.

Hi there. I think I accidentally got disconnected last time, I apologize.

No problem.

Congratulations on having good diversification and good top line. Obviously, particularly impressed on the bioanalytical side. And was just curious if you could elaborate on the profitability of some of those businesses? I know before on the life science side specifically, there was issues around whether or not that was going to return to profitability. I heard Bill mention that on the microarray side, you have something like 55% growth. If you could just discuss the profitability of that business?

Well, as you know, we have reorganized our whole life science business. So now we have it under a whole life science solutions business. And so we're not referring to integrated biology anymore. But that performance of that business group is record level and solidly profitable.

Including the formerly known as IBS.

Okay. And then I apologize if this question was asked before when I got dropped off. But obviously, the big question here is on the handset test side of the market, the wireless handset test. And I heard you say that you just didn't expect the consolidation to have the impact that it did. I just wondered if you could elaborate on that? If you kind of saw the consolidation happening, why couldn't you see some of that weakness coming?

Well, typically what happens is, as people look and again, this is a broad statement from Asia, not related to any particular Company. But after the holidays and one adjusts and look at inventories, they will be making a determination of their Q1, Q2 calendar year capital investments. It is our observation that the capital investments in first half of the year will be minimal at best.

And we're not unusual in being a bit surprised by the extent of the weakness. I think if you look at any of the cell phone-related semiconductor companies, they all got whacked by it. And it feels like just a typical six month digestion.

But I think the comment was around the consolidation -- was that really the impact? Or, also you mentioned before that if it's just more low cost handsets being made, that impacts you as well because you're not getting the software upgrade? I'm just trying to understand exactly the details behind it. It seems like if you had major customers consolidating you probably could have guessed that there was going to be a little bit of scaleback in their purchasing. But I'm wondering if there are other dynamics going on as well?

There's a -- again, five or six companies manufacture well over 80% of the cell phones in the world. So, the first order effect is the overall valuation of inventories and after the holidays. Second order effect is that we are seeing consolidation of smaller players. But that's clearly a second or third order effect. It's the overall industry in and of itself. And how long will the pause be.

Okay. Thanks.

Our next question is from the line of Richard Eastman of Robert W. Baird.

Bill, could you just maybe expand for a second or two on the aerodefense piece of general purpose? You mentioned I think that it was weak, there were a couple of areas of strength. But how do you view that marketplace as the year unfolds? Do we see recovery or how are you planning on aerodefense to look?

We still believe that the aerospace and defense market is a growth opportunity for us. Both in the traditional aerospace and defense, as well as in the homeland security area. And we saw mid single digit growth in that area. But the whole issue is, as Adrian had mentioned, is expenditures going to war-related activities versus the capitalization of the military. And I wish I had a crystal ball to suggest what's going to happen. But I would imagine there could be continued pressure as a result of the diversion of capital. But in terms of commitments to recapitalize instrumentation inside the defense industry, the opportunities in aerospace and defense, I believe that they're there and we're going to continue to make these investments.

Okay. And then also, just a follow-up question, maybe Adrian, would you expect to build backlog in the second quarter?

We seasonally typically build a little bit of backlog in the second quarter and in the fourth quarter. And then tend to cut it back a little bit in the first and third quarters. That's just our seasonality.

Okay. And then the last question I have, I just want to be sure that I'm clear. When you talk about distribution, are you talking about distribution for the core EM product lines? Or are we talking strictly about expanding the distribution for the low-end lower price point product that you introduced recently?

Well, the answer is both. We move into electronic distributor obviously we are setting this up for our basic instruments. But we make available to these distributors almost the full category, the full catalog of our instruments. And that's what gives us just enormous strength in this channel, is that we have the broadest instrument portfolio in the world. And so that's really giving us, I believe, a very strong competitive position in what is a new channel for us.

Would you want to give us an estimate as to how much of the EM, and I'm thinking more general purpose, goes through distribution currently?

We believe that $1 billion of the electronic measurement market goes through electronic distributors around the world. Of which today, we provide 50% of the products that we'll need socket for socket, box for box, for those types of product.

So you address $0.5 billion market but how much of Agilent sales go into that?

Right now, it's a relatively small percentage, given that we just launched this effort a year ago. But to be -- if we continue the momentum, we believe we'll clearly be number one in this server double market by the end of 2007.

Okay. Great. Thank you.

Our next question is from the line of William Stein of Credit Suisse.

Thank you. We talked about cash but we didn't talk about acquisitions in the quarter. I think you guys spent $70 million on some bolt-on acquisitions. Can you talk about what those were, the strategies behind them and what the strategy around acquisitions will be in the near term?

The one acquisition that we've made a public announcement on was a Company in Switzerland called Acqiris. They make a digitizer technology that is used both in aerospace and defense industry, as well as in applications in the bioanalytical space. The second acquisition we have not made a public announcement due to a competitive concerns. Long-term, as we have stated in the past, we will continue to look for key strategic bolt-on acquisitions that will enhance our growth rate and expand our technology capability.

And Bill, on which side of the business or both?

Both.

Absolutely on both. We're up to now 11 or 12 acquisitions and they tend to be evenly split between bioanalytical and electronic measurement. The bias will be over time, on the bioanalytical side.

And then just one more question. You tend to talk about your expectations for the macroeconomic view at least offline. And wondering what view is embedded in the fiscal second quarter guidance and the commentary you're comfortable with full year estimates. What kind of macro view are you guys embedding?

It's the proverbial soft landing. The Fed has done a spectacular job of modulating the growth down. It looks like this year, U.S. GDP terms will be in the 2.5% to 3% range. And Europe will be about 1 point below that. And Asia will continue -- in fact yesterday, you may have seen the Japan's GDP just came out with the strongest growth in self-years. So Asia is continuing to build momentum and that is disproportionately where we are today and where we're seeing the growth come from tomorrow.

That does it for me. Thank you.

[OPERATOR INSTRUCTIONS] Our next question will be from the line of Edward white of Lehman Brothers.

Hi, thanks. On the bioanalytical measurement side, can you talk about what factors are driving your relative success? You talked about the areas that are growing. But the increase in market share, to what can you attribute that?

Well, again, from our perspective, is the launch of our next generation 1200 series LC. We've been a leader in that part of the market anyway. We've just gotten enormously favorable acceptance. And likewise, the launch of our triple quad Q-TOF technology into a market where we essentially have had zero market share has been very well accepted. I believe we've approached or passed 200 installations to date over a very short period of time. We believe we have the right products with the right performance, ease of use, at the right price point. That we are getting a lot of customers quite interested in our product launches. You couple that with our continued investment, I mentioned in microarrays, informatics, consumables and support; our bioanalytical measurement business is just doing an outstanding job.

Okay. And then secondly, looking at electronic measurement, can you talk about some of the product successes there? That's also an area where you introduced quite a few new products. And it appears as though perhaps leave being aside the cell phone handset area, if you look at the business excluding that, you've probably taken some share there. Can you talk about how you feel about the product success in that side of your business?

As you know, we have very broad product line. So again, I don't want to leave anyone out. But first of all, we have to continue to win the wireless space, irregardless of what happens to the cell phone manufacturing market. The market acceptance of our new spectrum analyzer, our new signal source has been very, very favorable. We got real order momentum in Q1. And of course, we entered into the handheld spectrum analyzer market last quarter with a new product launch. We continue to also do very well in our component test business.

And so, the whole wireless area I think that we have a very, very solid product portfolio. In terms of all of our networking and digital, we continue to grow in oscilloscopes. We are continue to do well as the upgrade, as Deane had asked about the optical testing, moving forward. In fact, the whole that new segment that we have created had good year-over-year growth.

In terms of our electric instrument market, the story is expanding our product portfolio of basic instruments. We also continue to do well in just the contract manufacturing, in terms of in circuit tests, x-ray, and optical inspection. So again, overall, we have a lot of solid parts of our portfolio but unfortunately, the quarter was quite difficult for cell phone manufacturing.

Okay. And finally, if you achieve your goal of getting to the number one position in the distribution market, does it change your strategy on direct sales? Would you try to move some products that now go through direct sales through distribution or do you think that -- or do you view it as kind of a separate marketing channel?

What it's going to allow us to do is free up the direct sales organization to really focus on solutions. As we continue to provide integrated solutions in aerospace defense, wireless R&D, moving forward, all of our service providers, these are far more complicated, difficult selling process. And by being successful in an indirect channel, we'll really be able to free up our team to close, to work even better with the big telecom companies in the world and the big suppliers around the world

Great, thank you.

And our next question is from the line of John Harmon of Needham and Company. Please proceed.

Hi, good afternoon. I am a bit late, so please forgive me if you addressed this before. First question on oscilloscopes. Do you have a defined product cycle like four years or two years or do you develop and launch them just as you get new technologies ready?

Well, I think the answer is, it's probably across the spectrum. The part of the strategy that we need to make sure that we have a product portfolio oscilloscopes to meet the various price and performance specifications in the marketplace. So, that's task number one. Task number two is, it is a technology game with our competitors. And we seem to leapfrog each other every year or so. So, we sort of have the technology battlefront. And then we have the broad products required to be able to meet the various price and performance points in the industry.

Okay, thank you. And I did want to ask about some of the businesses you don't talk about that much. You said that in circuit tests and x-ray tests were doing well. What about parametric test and what about precision motion?

Well, the precision motion business actually had a strong quarter. As again one of our key customers also is doing quite well in the market. Again, these are laser and agrometers used in the whole stepper manufacturing business. Likewise, on the -- our parametric test actually was down, moving forward. We believe the orders were better but they were slightly down. That's one of the areas where we have the mix problem inside of our electronic business unit because the margins in that business tend to be quite high. And you just can't ship enough of basic instruments to make up the difference.

Great. Thank you very much.

And our question will be from the line of Matthew [Cullen] of TSW.

Hi, guys, thanks for taking my call. I want to make sure I heard something correctly. I can't remember if you said this Adrian or you said this, Bill. But I think you guys said that in the second quarter you expected the wireless test business will not get any worse. So, this sort of deceleration is more from the bioanalytical comps with the new product coming out, as well as probably 20% isn't sustainable forever, is that right?

That's correct.

And just conceptually with this business -- I'm kind of taking the glass half-full view of 75% of your business grew 15%. While that probably decelerates a little bit, can the wireless business snap back enough so that when you combine that with deceleration in the rest of the business, that snaps back so you can still sort of grow, high single digits for the full year?

We said that we believe that it will be flat in the first half. We'll begin to see a modest rebound in the second half. And that we're still comfortable, given everything in the momentum we have in virtually all the other businesses, that we will be able to achieve at least the range of analyst estimates for the full year.

Okay. Thank you.

Ladies and gentlemen, this concludes our question-and-answer session. I'll return to call to Rodney Gonsalves for any closing remarks.

Thank you, Cheryl. And thank you, everyone, for joining us today. We look forward to seeing everyone in New York for March 8 for our Electronic Measurement and Investor Forum. Again, thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes our presentation, and you may now disconnect. Good day.