安捷倫 (A) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Agilent Technologies 2007 second quarter earnings conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. At this time I would turn the call over to Rodney Gonsalves, Director Investor Relations.

Thank you, and welcome to Agilent second quarter conference call for FY 2007. With me are Agilent's President and CEO, Bill Sullivan; and 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. Adrian will follow with his review of the financials and the performance of each of the businesses. After Adrian's comments, we'll 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. Where we are also providing further information to supplement today's discussion. After you log onto our webcast module from our website you can click on the link for supplemental information, and you will find additional information such as our end market revenue break-outs 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 measures, you will find on our website the required reconciliation to the most directly comparable GAAP financial measure. In addition I'd like to remind you that we may make forward-looking statements about the future financial performance of the Company, that involves 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 factors at work. The 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 the current quarter. Now I'll turn the call over to Bill for his comments.

Thanks, Rodney. Hello, everyone. Our Q2 results repeated many of the trends and strengths that we saw in Q1 as we continued to leverage the strength of our higher operating model to higher sustainable, profitable growth. Orders are up 10% over last year, while revenue increased by 7%. Operating margins reached 15% and return on invested capital was 25%. We saw a very strong balance between our Bio-Analytical measurement and electronic measurement businesses in both orders and operating profit.

Turning to our results by business, our Bio-Analytical measurement business delivered excellent financial results. Year-over-year revenue growth at 15% tops all major competitors. We saw strength in both our chemical analysis and life science business units. We saw double-digit growth in all major geographies, led by China, India, and eastern and central Europe. Life science revenues are up 20%. Customers are investing in applications and tools that accelerate time to market and improved work flows. As a result applications for mass spec and diagnostics and array platforms continue to grow.

We now have a market leading position in CGH microarray applications. We also continue to see strong demand for our 1200LC rapid resolution systems, high-end LCMS, multi pack arrays and HPLC columns.

In chemical analysis revenues are up 11% from last year. LCs grew by double-digits while LCMS sales were more than double than a year ago, fueled by the success of our new products. GC and GCMS were dampened as expected in anticipation of our recent introductions, but market acceptance of the new products has been excellent and we expect increased revenue in Q3. Going forward our strategic intent is to continue to provide industry focus work flow solutions to our key segments. We'll continue to focus our R&D, customer collaboration, and M&A efforts in refreshing and expanding our portfolio, improving customer work flow requirements, and providing full application solutions to our customers' needs.

Turning to the other side of our house, our electronic measurement business had a 3% growth over last year. We saw sustained strength in our general purpose and commuter semiconductor-driven businesses. But this was dampened by continued year-over-year declines in wireless manufacturing. Excluding wireless handset test, revenue growth and electronic measurement was about 7%. General purpose test grew 10% over the last year. The overall health of global economy, the continued proliferation of electronics and communications into more populations and applications continue to fuel demand for our broad portfolio of general purpose test equipment. Consumer electronics are a particularly bright spot where we have an industry leading platform in HDMI test solutions.

The communications test business was down 7% from a year ago. Our wireless manufacturing test business was again down year-over-year, however, we think this business may be bottoming. Our strategic focus in wireless R&D continues, while increasing customer demand for integrated devices is driving investment and requires sophisticated development tools. Going forward, our electronic measurement strategy will be continue to focus on offering complete test application solutions for rapid growing segments rather than just products. HDMI and WiMax are two good examples of more to come.

At a company level we continue to invest in a set of strategic growth initiatives. In Bio-Analytical measurement these include life science, laboratory informatics, and mass spec. Electronic measurement growth initiatives include aerospace and defense, communications and low cost instruments. Overall the pace of ordering is improving. The pickup in second quarter electronic measurement bookings to 8% combined with a steady 14% growth in Bio-Analytical orders bodes well for our prospects in the second half. For the third quarter of FY '07, we expect revenue of 1.36 to $1.4 billion up 10 to 13% from last year. We anticipate adjusted net income to be in the range of $0.46 to $0.50 per year, 18 -- or $0.50 per share, 18 to 28% 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. As usual I'm going to offer a few perspectives on the quarter for Agilent, review the performance of our two business segments, and conclude with some thoughts about third and fourth quarter guidance.

Looking at overall Agilent, over all Agilent had a solid second quarter performance, one that was very much in line with our expectations. We experienced another quarter of weakness in handset manufacturing test but towards the end of the quarter we all saw the -- also saw the first indications that that market may be bottoming. We also saw sustained strength elsewhere in electronic measurement with revenue growth of about 7%.

In our Bio-Analytical segment we had another strong quarter with orders up double-digits for the fourth consecutive quarter and revenues up 15%. Overall, revenues and earnings hit the middle of our guidance range at 1.32 billion and $0.43 respectively. Incrementally we brought $0.40 of every incremental revenue dollar to the bottom line. The high end of our 30 to 40% expected range for operating profit increases.

Gas generation was also a highlight for the quarter. Receivables days outstanding improved by four days. On the other hand inventories were six days higher than last year because of the weakness in electronic measurement and our expectation for stronger segment growth in the second half of this year. Our return on invested capital improved to 2 points to 25% and generated $302 million of cash from operations during the quarter. In short, we think our second quarter demonstrated, once again, Agilent's strategic intent to leverage to higher sustainable growth, the robust operating model that we have built.

Okay. Turning to the overall numbers. Orders were $1.4 billion, up 10% from last year. Electronic measurement orders were up 8%, Bio-Analytical orders were up 14%. We think that strength in second quarter orders across both electronic measurement, and Bio-Analytical bodes well for our prospects in this year's second half.

Second quarter revenues of $1.32 billion were 7% above last year with 2 points of that growth due to currency. The distribution of growth was about 8%, positive in the Americas, 13% growth in Europe, and a flat Asia-Pacific up only 1% because of of the weakness in handset test. Currency had an equivalent impact on expenses so no material impact on our bottom line from currency. Gross margins at 56.9% were the highest on record, up 3.1 points from last year, or up about 1.8 points on a comparable basis after the refunctionalization of expenses out of cost of sales and into operating expenses. Similarly, operating expenses are up about 1.4 points as reported, were essentially flat as a percentage of revenues after refunctionalization. In addition, currency hit operating expenses by about $13 million because of the weaker dollar and variable pay was up about $4 million because of the 2 point improvement in the Company's ROIC. Actual discretionary operating expenses were up about $18 million from last year, or about 4%. Of that $18 million year-to-year increase in operating expenses, $10 million was due to acquisitions made in the past year.

As reported, we had R&D of about $164 million or 12.4% of sales, essentially equal to last year. SG&A at $388 million was 29.4% of revenues up 1.4 points from last year, again, almost entirely because of the acquisitions. The Company's operating margin at 15.1% was up 1.6 points from last year's second quarter and the best second quarter performance in the Company's history. Operating profits during the quarter were $199 million, up 19% from last year. Other income in the quarter was about $29 million compared to 28 in the first quarter. Pretax income was $228 million. We had taxes at a 23% pro forma rate or $52 million, for a net income of $176 million compared to 162 in the first quarter, and 157 in the second quarter of last year. On a per share basis we reported $0.43 per share compared to $0.36 last year at this time.

Okay. Going from operating earnings to cash, table five of our press release financial tables provides a detailed reconciliation from non-GAAP to GAAP income. Summarizing, we had non-GAAP income of $176 million. We had about $10 million of realignment costs, about $18 million of non-cash amortization, $40 million of share-based compensation, we had a tax benefit of $19 million, and $4 million of other miscellaneous expenses getting us to GAAP income of $123 million this year compared to $115 million in last year's second quarter.

A word on the $40 million of share based compensation. That $40 million of share based compensation costs was about $10 million higher than we expected because of two one-time items. First, our long-term performance plan for senior managers is a three-year performance based share plan which we have been accruing of 100% payout. However in the three years ended in 2006, Agilent shares outperformed the vast majority of our peers and competitors as did our earnings growth. Consequently we had a $6 million true-up to this plan to recognize a maximum plan payout. Second, we had a $4 million acceleration in costs related to the separation of a senior executive. For the third and the fourth quarter we expect total equity based compensation costs to be in the range of $26 million per quarter.

Turning to cash, I've already mentioned the mixed working capital performance, if inventory stays on hand at 103, 6 days worse than last year, and receivables days sales outstanding at 49, 4 days better than last year. The total cash from operations was $302 million in the second quarter compared to $93 million in the first quarter. We had capital spending of about $42 million in the second quarter, compared to $37 million in the first quarter, and, by the way, for the year we still feel that somewhere around 150 to $160 million is the right number for CapEx. Therefore, we had free cash flow from operations in the second quarter of $260 million. Included in that was depreciation and amortization of about $47 million. We only spent about $2 million this quarter on acquisitions, compared to 70 in the first quarter, on the other hand, we spent $382 million on share repurchases, up from $254 million in the first quarter. We had share issuances this quarter of about $62 million, or net repurchases of $320 million We ended the quarter with $2.05 billion of cash and short-term investments. I should also mention that to date we have purchased about $721 million of shares of the $2 billion program, and we will complete the remaining $1.3 billion in this year's second half.

Okay. Turning to the segments and starting first with Bio-Analytical, our Bio-Analytical measurement segment continued the momentum we've seen in recent quarters. With second quarter $457 million, up 14% from last year and the fourth consecutive quarter of double digit growth. Revenues of $428 million were up 15% with strength across the portfolio of instruments, consumables, and services. Geographically revenues were up 11% in the Americas, 19% in Europe, and 16% in Asia. Life Sciences revenues of $194 million were up 20% year-over-year. Life Sciences revenue growth was again driven this quarter by the success of our new 1200 series LC platform and our expanded LCMS portfolio which includes the single quad, the triple quad, and queue talk. We're also seeing strong demand by oncologists and cyto geneticists for our array CGH tools.

Pharma and biotech markets were up over 20% year-over-year with continued strength in the 1200 series rapid resolution system, our HPLC columns, and our LCMS portfolio. We also saw increased R&D spending by pharma companies and our contract research organizations for new applications and for enabling technologies to speed time to market for new drugs. We are also seeing more pharma collaborations with both university and federal research labs. In the academic and government markets, funding remains strong across the major regions and we're seeing increased demand for our CGH micro array applications. Customers utilizing these new genetic measurement technologies are also creating demand for our genetic analysis software.

Turning to chemical analysis, revenues of $234 million, were up 11% from last year. Market acceptance of our new gas chromatograph and GCMS platform has been excellent and above expectations, as Bill mentioned earlier. Consumables and services also grew at a double-digit rate this quarter. In the forensics market, increased drug usage in many regions is driving new test protocols. Our business in this market was up over 30% year-over-year.

Revenue in the food safety market was up about 7% from last year driven by updated regulations in developing countries. We continue to see the strongest growth in India and China, while in the U.S. the recent pet food scare has caused concern regarding the safety of our consumer food chain, leading to calls for tighter FDA regulations.

Petrochemical showed slower growth, about 3% this quarter but only because of the traction -- because of the --excuse me, because of the transition to our new GC and GCMS products which has deferred some revenue from the second to the third quarter. Petrochemical orders were up 16% and revenue would have been up 15% excluding the impact of this new product introduction. Finally, we saw 14% year-over-year growth in the environmental market driven by evolving regulatory standards for drinking quarter water, solid waste, and air monitoring demands particularly in China and India. We also saw strength in Europe driven by the consolidation of large labs and investments in LCMS. So, again, revenues, $428 million during the quarter, up 15% from one year ago. In the second quarter, gross margins improved by 3 points from last year to 53%, and operating margins improved by 4 points to 16%. That's nearly $0.40 of every incremental revenue dollar dropped to the bottom line. Segment ROIC improved fully 6 points to 27%.

Turning now to electronic measurement, second quarter electronic measurement orders of $943 million were up 8% from last year, double the average of the prior four quarters. The pickup in orders was due to sustained momentum in general purpose test and a bottoming in the wireless handset test market. Revenues of $892 million were up 3% with the Americas up 7% and Europe up 9%, but with Asia off 3% from one year ago. Excluding handset test, segment revenues were up about 7% from one year ago.

General purpose test revenues of $563 million were up 10% from last year, aerospace and defense was up about 6% year-to-year, with strength across a broad portfolio of products into this market, including RF and microwave signal sources, TXA, MXA, network analyzer products, system and ATE products and scopes. Revenues in the computer semi-and nanotech markets were up 10% this quarter from last year driven by the proliferation of new digital devices and high-speed interface standards. Additionally, we're seeing increased business to our distribution channels, to our new oscilloscope, the Oscar, which is targeted for this market. And finally consumer electronics related businesses were strong again and particularly strong within general purpose, up 11% from last year, driven by increased demand for gaming consoles, LCD, and plasma TVs, higher resolution cameras, MP3 players and PCs.

In communications test, revenue was $329 million, down about 7% from last year. As anticipated the weakness we saw last quarter in wireless handset manufacturing test extended into the second quarter. However, we think we did see some signs of bottoming in this market and we do expect to see a gradual recovery beginning in the second half, as excess capacity is absorbed and new device designs begin to enter volume production. Wire line demand was good and is being driven by the convergence to an all IP-based network. Increased consumer demand for integrated devices, with voice, video, data, and audio services requires sophisticated development tools and is driving our wireless R&D business.

For wire line we're seeing an improvement in the NEM capital spending and we expect this to improve further in the remainder of this year and into 2008 as we introduce new platforms. We're also seeing demand for high speed data test applications and optical transceiver manufacturing. Optical component test demand is very strong with both power meter solutions and tunable lasers performing particularly well. On the other hand, for wireless manufacturing the environment remains challenging. Although subscriber growth remains solid, much of the handset unit volume growth is occurring more in the low to mid-range phones. As the market continues to evolve in this direction, Agilent is keeping pace by our continued investment in developing less expensive and faster test solutions for our customers.

In wireless R&D, we saw the strongest spending on high data rate applications for wide band CDMA and GSM as well as WiMax EVDO and WiMax. We introduced WiMax solutions including the first one box test for WiMax product development and manufacturing. Geographically we expect growth in India, Taiwan, and parts of China as more R&D shifts to those locations and we're adding more R&D resources and technical support to our China development center to retain our competitive advantage in servicing key Asian customers. So, again, revenues in the segment were $892 million, up 3% from last year. Segment gross margins improved 3 points to 59%, an all-time high, while operating margins improved less than a point due to the $10 million of increased operating expenses associated with acquisitions made over the past year. Nonetheless, $0.40 of every incremental revenue dollar dropped to the bottom line. Segment ROIC improved 2 points to 25%.

Finally, looking at third and fourth quarter guidance, as we mentioned earlier, we believe that the second quarter pickup in electronic measurement orders to 8% year-over-year, combined with the steady 14% growth in Bio-Analytical orders, bodes well for Agilent's second half performance. Our third quarter guidance is for revenues of $1.36 billion to $1.4 billion, up 10 to 13% from last year, and for operating earnings per share of 0.46 to $0.50 up 18 to 28% from last year. Normal seasonality would suggest that fourth quarter revenues would be roughly 5% above the third quarter. For earnings, if you looked at the last three years you would see a $0.07 to $0.08 increase from Q3 to Q4. The expected reduction in shares outstanding should add another $0.01 to $0.015 or roughly a total of $0.09 per share compared to Q3.

One final clarification. None of this guidance includes the impact of our acquisition of Strategene which we now expect will close before mid-June. If appropriate, we'll update our guidance at that time. With that, let me turn it back to Rodney.

Thanks, Adrian. Please go ahead and give instructions on the Q&A.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Ajit Pai with Thomas Weisel Partners. Please proceed.

Good afternoon and congratulations on a solid quarter.

Thank you.

Two quick questions, the first would be, just looking at the commentary you have provided on the wireless handset test and things having bottomed over there, what gives you confidence that things have bottomed and what kind of improvement did you see going into this quarter?

I think on a macro perspective, there is evidence that there is a pickup in the overall cell phone market. The second one we actually did see a quarter where our orders were slightly ahead of our revenue, so that was good news. Again, we're not, as Adrian mentioned, we're not predicting a substantial change in the second half, just ongoing, continued progress moving into the end of the year holidays.

Okay. And the second question would be just about the flow-through on to the bottom line. I think you talked about some pretty tremendous leverage of $0.40 flowing through, but on a go-forward basis, your margins have expanded already quite materially. Are you seeing any inflationary pressures, do you have to hire more people? Or can you continue to expect $0.40 leverage that you've been seeing recently for the next several quarters?

Ajit, we have said at this point in our development of our business model and in the economic cycle that 30 to 40% is what we would expect so obviously we were delighted to be at the high end this quarter, but we would not anticipate hitting that number each time. But as to inflationary pressure, we're not really seeing them. We're involved in global markets. 40% of our business is in Asia, 25% of it is in Europe, so we have very good distribution and we're always trying to ride Moore's Law, just like everybody else. So we feel pretty confident that we can continue to point to that organic 30 to 40%, at least for the next year or two.

Thank you and I'll get back in queue.

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

Hi, good afternoon.

Hello.

Just a couple of questions, please. To ask a question, just a different way, what -- given that the Q3 is normally your weakest quarter of the year, what is it really on the margin that picked up that is causing you to be so much more positive on your guidance? Is it handset tests turning around?

Again, as I had mentioned before, what we are quite pleased with is the order momentum in our electronic measurement going into Q3. This 8% growth was across the board in all of our markets from aerospace and defense, to general instrumentation, consumer electronics. We're very pleased with the market acceptance of our products, and as you know, we've introduced just some of our broadest and widest new product offerings in our history and we just saw real momentum going into Q3. Likewise we continue to get great acceptance from our product offerings in the Life Science and chemical analysis side and that is why we're entering into Q3 quite hopeful.

Thank you. Secondly, how did your oscilloscope business do and what was the name of that product you mentioned with the name--?

Oscar. Our oscilloscope business continued to do very, very well and again had another very substantial double-digit growth rate.

Great. Thank you very much.

From the line of Merrill Lynch, and we have John Groberg.

Hi, good afternoon.

Howdy.

How you guys doing.

Great.

Congratulations on executing well. Three, I guess three quick questions, if I may. The first, just to continue on the line of what you're seeing and what gives you the confidence, but on the other side of the business you mentioned that the GCMS is a little weaker primarily because of these new products which you have introduced and I just wanted to understand a little better as to what gives you the confidence it is going to pick up. Did you see a lot of orders for these products and they weren't ready to ship yet? And so you are confident in this next quarter that they're going to ship? If you could just provide a little more color there?

Let me clarify about that. Our orders would have been up 16% in the segment. In fact our orders for GCs and CSMS were up 16%. It wasn't an issue of orders. The reception we have gotten from our new GC and GCMS platform has been outstanding, it is that we were not scheduled to begin delivery until the end of the second quarter, so those deliveries will pick up in the third quarter.

That clarifies. You did see strong orders, you just weren't able to deliver them?

Correct.

And then staying on the Bio-Analytical side just for a second also, you had close to 19.5% operating margins in the first quarter which isn't -- is somewhat a stronger quarter. But fell down to about 16% this quarter, and I'm just looking kind of at first Q '06 to 2Q '06 had kind of similar drop-off. I'm just curious if that was along the lines of your expectations or if there was something going on that maybe pulled those down a little more than you expected in this quarter.

No, we have a very strong seasonal in the second quarter, it is when our expenses go up for a large variety of reasons, and it is also when we have a large amount of our marketing expenses for trade shows and others. As you pointed out, we tend to have a fairly significant drop between Q1 and Q2 but then rebound to at least those levels in the second half and we expect that again this year.

Final question, you mentioned you expect Strategene I think to close at the end of June; is that what you said?

Before the middle of June.

Mid-June. Can you must -- maybe, Bill, just describe a little bit again how you see that business folding into the life science business and where you see most of the synergies there?

If you look at our core business has been a very box-driven, instrument-driven business, and we continue to make investments to expand into the total work flow of scientists and researchers and in the very simplest sense we believe the capability of strategy and being part of the Company, particularly the strength in genomics, we will be able to broaden our product offering to our customers, just indirect measurement, better measurement through the chemical interaction of reagents and the molecule under test, I think will just provide a much more inclusive solution for our customers that I think will continue to drive our business forward.

Okay. So I think there have been a little maybe -- I don't know if it is confusion, and maybe it's just both, but do you see it is more leveraging your distribution channel that you currently have with this new product, or using Stratagene's access and some of the academic government markets to gain more traction with some of your products there?

The first question I would answer our offerings to the market in general will be broader than it is today, by the middle of June. Clearly I think we have some opportunities to accelerate our growth in our channels and likewise, as you had said, they also have a very strong position in the whole academic area, and, again, based on our own market studies we see the academic research market at $7 billion equivalent to the pharma biotech markets. Just an enormous amount of money that is going into universities, and government institutions around the world and I believe that Stratagene will really help us leverage us into this market where we have relatively low market share as compared to pharma and biotech commercial companies.

And this last follow-up on that, Stratagene itself. I know they had a lot of legal expenses, is -- was the purchase contingent on you being able to know that you could settle those legal issues, or is it just kind of an update on to the legal situation there?

We don't comment on legal situations. The deal is not contingent on any legal issues but we are obviously are confident to get issues resolved and move forward.

Okay. Thanks.

Representing Robert B. Baird, the next question comes from Richard Eastman. Please proceed.

Adrian, I was wondering if you could just better define the electronic measurement orders -- order growth in Asia, excluding the handset test business. Was demand there in other areas of EM strong?

Yes, it was. That particular flavor, I don't have at my fingertips but if you were to pull that business out of our Asian activity, I think we're up roughly 15% in electronic measurement in Asia year-over-year.

Versus the average up 8% in orders overall for EM, you would think it is double that, outside of handset tests?

Order of magnitude.

Okay. That's fine. Is it possible to just give us a flavor for what the handset test business did year-over-year in terms of percentage decline?

It was down 25%.

25. And are comparisons now ease up -- is the revenue run rate today in this finished second quarter, is that run rate in dollars, how does that compare to say the third quarter level of last year?

Again, I don't have that one at my fingertips, but I think in general what you're getting at, is that do the comparisons become easier? They become much easier going forward, even if there wasn't any rebound, but we do expect that it did bottom and we do expect a modest rebound to begin.

Okay. Very good. Thank you.

With Goldman-Sachs you have a question from the line of Deane Dray. Please proceed.

Thank you. Good afternoon. Could you give an update on the growth initiatives you called out on the electronics measurements side, I believe it was aerospace, defense, com test and the low cost instruments?

In terms of meeting our expectations, our low cost instruments business continues to do very, very well as we see double-digit growth. We signed up over 70 distributors around the world and very pleased with that progress. Likewise the acceptance of some of our new platforms, such as WiMax into the wireless R&D community, is going very, very well. Aerospace and defense is basically being driven on what I would call our core business needs. We're continuing to make real progress in synthetic instrumentation and our whole LXI contribution to the market. But, as you know, there is just lots of concerns about the availability of money for capitalization in the military, versus the needs of the war.

Have you seen any change in the funding on that side?

No.

Okay. And then just a question on Asia. I've spent the past week in China, and have heard some rumblings and seen some rumblings about some new corruption investigations into the equivalence of the Chinese FDA. And the country just went through a similar process with medical purchasing. So they do a halt the ball medical sales in the hospitals. Have you heard yet of any issues at the Chinese FDA? I know you have got a great relationship there. Just was wondering if this has developed any further.

I don't have any more information than you do in terms of what has been in the, published in the press.

Okay. And then there was a news item came across the wire about a $300 million credit pack for Agilent. Is there anything there or is that reupping an existing program?

That is our revolving credit agreement. We have not had one in several years, and we have just put one in place.

And is this -- is this contingency with the expectations.

This was the standard revolver. We were planning to do this. This is part of the maturing capital structure of the Company. We have no intentions of borrowing against it, but as you know having a backup facility is something that the rating agencies like, and you never say never so it's like to have that just in case.

I know you never say never, but any further developments or commentary on the dividend front?

Nope.

No additional color or just no?

No.

Again, right now our task at hand is to complete the repurchase by the end of this year of the $2 billion that has been accelerated by one year. As you can tell by our cash generation, we will continue to have excess cash at end in this year and we will continue to work with the Board of Directors to make the best decision for the shareholders of Agilent.

Great. Thank you.

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

Thanks. With the strong order momentum across the board during the quarter, can you talk about how much of that was sort of business climate and how much of it was, sort of qualitatively how much of it was sort of market share gains, because you've got success with the new products and how much of it was more new distribution channels and marketing?

I think overall the drive has been driven by having the right products for the business opportunities that are out there. Enormous amount of research and development going into new standards, both in wireless, in terms of wire line, and there's just a lot of tools that scientists and researchers are demanding for life science discovery. And so our number one focus is getting the products into the right segment of the market to be successful. If we gain some market share over that or not I think that is a second order effect. Our focus right now is getting the right products for the right markets, and to deliver them in a real value to our customers as well to our shareholders.

Okay. Then secondly, you mentioned the strength in optical, which is an area that hadn't really been strong in a while. Can you talk about some of the dynamics behind that, what is going on there, and what you think is driving that.

I think it is just the whole movement to IP networks, inclusive of IPTV, there is a very large investment in this transformation, and it is just an enormous amount of optics required to make that happen, so that first quarter was driving the increase in investment.

Great. Thank you.

Your next question comes from the line of Mark Moskowitz, with JPMorgan.

Yes, hi, good afternoon. A few questions here, Bill and Adrian. Getting back to your commentary regarding the bottoming and handset manufacturing and your view that it should at least stabilize going forward. Can you maybe give us some context around how we should think about margins going forward in terms of some of your customers moving more and more to lower cost of test emphasis, because they're moving to the lower end of their price spectrum?

As I said many times, I think the market will continue to be bifurcated before what will be essentially a voice only cell phone, targeted for emerging market and of course the very high end sophisticated phones, that typically are being consumed in the more developed countries that have a lot more functionality in it which requires more tests. The biggest issue that we have in terms of our own margin, of course is that our customers want to have higher throughput through our instrumentation. And so that -- so where the impact is, is just the overall volume, first order, not that we're being necessarily squeezed more on the actual capital purchase itself, but we've been working with each of our major suppliers, and fixed companies have 85% of the market and they just want to have increased utilization of the capital that they have, and that's why we spent quite a bit ensuring that we have a very smooth software transition on their existing capital base to be able to take on new standards and of course continue to improve their own throughput of their existing capital base, and that's really where the pressure is.

Shifting gears to the sequential gross margin improvement in electronic test. Can you maybe give us, maybe rank and order in terms of how much of that was driven by your percentage of business from new products, versus maybe just strength in scopes, versus maybe some of your focus in terms of becoming a bigger player in the wireless R&D side of things versus the manufacturing.

I don't think at this point that I could specifically put one finger on it other than, number one, is that we want to make sure that we provide a value to our customer that differentiates us. We don't compete on me-too products and on price. Secondly, as you know, we have made a major effort to really try to streamline our manufacturing locations and processes and you're continuing to see progress in that. In fact, if you go over the last two years, our gross margin improvement has been quite dramatic. It is an ongoing process, so not only do we focus on having the right products to the marketplace, the manufacturing teams around the world really focus on maximizing our leverage and working with our own suppliers to ensure that can he can get competitive pricing of our components.

As far as the sustained leverage opportunities, is there a way you or Adrian can talk about your efforts over in India in terms of your [Mansard] investments there and what is going on and is that focused on just electronic tests or is that for Bio-Analytical as well?

The first part Adrian talked about is really focusing on a lot of our back end operations and one of the ways we've been able to continue to drive down our SG&A and the balance of our activity in that area has been investment in the research and development for software development.

Yes, we really moved quite dramatically beginning several years ago to do a offshoring -- it is Agilent people, and to build a finance and IT capability of Agilent people outside of deli and that has been extremely successful. Because we have built a team that is not just transaction processing but really is moving up the verticals as well as across the functions, to higher value added finance and IT activities, we've also been very good at working with strategic partners around the world to lower costs. At this point we have a very robust finance IT and what we call global infrastructure services capability headquartered in India and we're continuing to leverage that. The new headquarters that you were talking about, will begin construction imminently.

And just lastly before I cede the floor. As far as Bio-Analytical can you maybe give us some sort of insight in terms of beyond the revenue performance, obviously your revenue performance relative to your peers has been quite impressive at recent quarters, but just in terms of the margin trends how much of the margin trend uptake potential is there based on, one, just improvements with your customers in terms of their reception, their adoption, in terms of what you can provide for their work flow, versus maybe from delayed orders or deferrals because of some of your new products. Lastly, I'll try not to lose you here, but maybe just because of some of your efforts on the consumables stream, do you see one or two or three of those various factors starting to work in your favor to bring your gross margins even higher going forward.

The number one issue that we've had historically in Bio-Analytical has been what we call integrated biology, which now they call life science or micro analytics efforts have been losing money. That had been the number one issue. We made the commitment that we would dramatically improve that. Our micro ray business in Q1 grew over 40%, 50% in Q2. That is the single biggest change we've had in this group is that we're going to dramatically improve that. Our micro array business in Q1 grew over 40%, grew over 50% in Q2 and so that is the single biggest change that we have had in this group. Is that we will be heading to very substantial profit I believe in our micro array business and we have essentially negated the past losses that we have had. That is issue number one.

Issue number two is that the new product introductions that we're making into the marketplace are designed to provide the quality, the reliability, the ease of use for our customers while trying to take advantage in the synergy of the Company to try to do that in the most cost effective way. The third part, which you alluded to, is that we continue to make excellent progress on our consumables, expanding or product platform, we have introduced very sophisticated columns for our rapid resolution, all of which is helping us drive forward to higher margins.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes as a follow-up from the line of Ajit Pai with Thomas Weisel partners. Please proceed.

On the acquisition pipeline can you give us some color as to what the pipeline looks like right now, and whether in terms of valuations, also in terms of probability of something, additional closings before the end of the year? And also whether the focus is much more on the Bio-Analytical side or the electronic measurement side.

Well, of course, we never make comments about anything in our pipeline, for all of the obvious reasons but I've been very public that our focus is to continue to solidify our Bio-Analytical business and that has been the focus of our investment such as the acquisition that we recently announced.

Then just looking at the strength on the wire line side of things, could you give us some color as to how much of that is on the field side and how much is in the lab? And also, when you're looking at wire line as a percentage of the communications business, approximately what percentage it would comprise of your orders or revenues in the current quarter?

The overall wire line business was 5% of the total company's business in Q2. Again, our largest part of our business would be in the laboratory and manufacturing. Our installation and maintenance part of this business is relatively small.

Okay. Thank you.

Your next question comes from the line of [Chris Sankar], with Banc of America.

I joined a little late, so pardon me if it's repeating. Are you guys still maintaining a 8% year-over-year growth for electronic measurement?

I'm sorry. What was the question.

Are you still targeting 8% growth in electronic measurement year-over-year?

That is what our -- if we are able to successfully implement our growth initiatives, that would be our target, which would be roughly 2 points higher than where we believe the overall market is growing. Again, we have to implement our growth strategy and continue to maintain and grow our base business. That is why we were encouraged that the order growth, in Q2 at least, was in that range even we have not demonstrated that on the revenue front.

If you do end up demonstrating, which basically means the second half would be 15% up. Which part of electronic measurement do you think would be the biggest driver, wireless or network or?

It will be the general purpose instrumentation across the board will be the biggest driver for our growth.

Okay. Thank you.

Ladies and gentlemen, this now concludes the question-and-answer session. At this time, I will turn the call over to Mr. Gonzales for further remarks.

Thank you for again, joining us today, and that concludes our conference.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may all disconnect, and have a good day.