安捷倫 (A) 2008 Q1 法說會逐字稿

Good day, Ladies and Gentlemen. Welcome to the quarter one 2008 Agilent Technology Incorporated earnings conference call. My name is Michelle, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

And I would now like to turn the presentation over to your host for today, Mr. Rodney Gonsalves, Director of Investor Relations. Please proceed.

Thank you, and welcome to Agilent's first quarter conference call for fiscal year 2008. 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 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 on to our website module, from our website, you can click on the link for Supplemental information. 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 measurements.

In addition I would like to remind you that we may make forward-looking statements about the future financial performance of the Company that involves risk 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 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.

Lastly before I turn the call over to Bill, I would like to note that Ron Nersesian, Vice President of General Manager of Agilent's Wireless Business Unit, will be presenting at the upcoming Goldman Sachs Technology Symposium on Tuesday, February 22nd.

Now I will turn the call over to Bill for his comments.

Thanks, Rodney. Hello everyone. We have just completed the first quarter of our fiscal year 2008. This is the first quarter of year two of our transformation to a singular focus on the $43 billion measurement market. A Measurement market that is broad-based, and touches every technology industry in the world.

We strongly believe that Agilent is uniquely positioned to provide innovation and cost effective solutions for our customers measurement needs, anywhere in the world. Furthermore as we have demonstrated in fiscal year '07, we have the ability to provide these Measurement solutions, within the context of an operating model, that can deliver 8 to 10% revenue growth, greater than 14% operating profit, and 21% return on invested capital through an economic cycle.

Our results in Q1 continue to demonstrate the balance of our portfolio across markets and geographies, as well as the strength of our disciplined operating model. Revenue was up 9% over last year, while orders increased by 12%, the highest rate in two years. Operating margins reached 14%, and ROIC was 23%, delivering an adjusted net income of $160 million, or $0.42 per share. Both revenue and earnings were near the high end of our guidance.

For the second quarter of FY '08, we expect revenue growth up 6 to 10% from last year, adjusted net income will be in the range of $0.46 to $0.50 per share, 7 to 16% above last year's comparable earnings. While we remain cautious, we continue to be comfortable with the range of analysts full year estimates. Adrian will shortly provide you with with a detailed performance of our operating unit, but I would like to take a few minutes to discuss why we are cautiously optimistic, about our ability to continually meet our growth objectives, while maintaining our operating model.

There are three factors supporting our belief in Agilent's ability to continue the momentum in Q1 2008. First, our geographic footprint and ability to capitalize on regional opportunities. Second, the continued success of our key strategic growth initiatives, and third, the flexibility we have built into our operating model to allocate resources to opportunities, while we continue to increase the variability of our cost structure. With 60% of our business focused on the Electronic Measurement industry, and the balance of 40% of our business serving the Bio-analytical Measurement business, only 31% of our Q1 revenue was generated in the United States.

In the Americas, while there is clear evidence of softening in the semiconductor and contract manufacturing market, we are very pleased with our growth in wireless R&D, Aerospace and Defense, and the petrochemical industry, as well as the early success of our acquisitions, which helped drive our 5% year-over-year revenue growth.

Moving into Q2 of 2008, while we see a change in mix of opportunities, we believe that our overall outlook is consistent with the business outlook in the Americas. In Europe, we saw strong and balanced revenue growth at 13% across all business groups. Aerospace and Defense was strong, following several difficult years. Wireless and broadband had solid growth. Likewise, both Life Science driven by Proteonomic research, and Chemical Analysis driven by food and environmental industries had excellent performance. We believe these trends will continue.

In Asia, our 9% revenue growth was accelerated by 17% growth in Japan. Japan's results were driven by significant growth in Aerospace and Defense, general purpose, and wireless R&D. Wireless and broadband growth offset continued weakness in semiconductor perimetric test, and modest growth in our analytical business.

Outside of Japan, we continue to experience difficulties in Asia in the semiconductor and contract manufacturing market , however we experienced solid growth in our wireless business, and excellent growth in both our Life Science and Chemical Analysis businesses across all sub-markets, with particular growth in China and India. Even with some of the difficulties in Asia, we believe we are in excellent position to capitalize on the region's growth opportunities.

In summary, our ability to maintain our 8 to 10% annual growth rate will be dependent on our continued ability, to aggressively address growth opportunities in the many regional sub-markets. Our growth initiatives are directly tied to the emerging opportunities that we believe will help support our overall growth objective. Our #1 strategic investment continues to be directed at the $17 billion Life Science market.

Our recent acquisitions of Stratagene and Velocity11 are going well, and helping to drive our 24% revenue growth in Life Sciences in Q1. Moving forward, we believe we are well-positioned to provide integrated workflow solutions in the Life Science market.

The next two growth initiatives are focused on wireless R&D, and Aerospace and Defense and Surveillance. We are very pleased with our Q1 2008 results. We are a leader in the emerging next generation standards of WiMAX and LTE protocol tests, which helped drive our overall wireless revenue by 10%.

Wireless R&D now accounts for 8% of our overall business, versus wireless manufacturing at 6%. Wireless manufacturing still grew 11% in Q1, in an easier compare over last year. Likewise, our Aerospace and Defense, Intelligence Surveillance and Reconnaissance revenues were strong, with a solid 19% year-over-year growth.

We continue to make investments in wideband signal analysis solutions, which have been well-received by our customers, in addition. we continue to make solid progress in our basic instruments with solid double-digit growth for the quarter. Combining the success of our major growth initiatives, with our continued investments across our core instrument platforms, and our geographic reach, we believe we are very well-positioned in a potentially difficult economic environment. The foundation of our strategy is Agilent's operating model, which we have instituted throughout the Company.

We are focusing on market opportunities consistent with our operating profit, ROIC, and cash flow committment. We are near completion of restructuring businesses that are in difficult markets, such as Electronics Manufacturing, Telecom, Assurance Monitoring.

We have implemented a variable pay program throughout the Company, that is directly tied to our committment. In addition, there is a 100% line of sight between the rewards and commitments of our top management.

Finally, we have dramatically improved the flexibility and variable cost components of our manufacturing organization. We have transferred operations to low cost countries. We have outsourced PC Boards and sub-assemblies, and we are aggressively focusing on procurement.

Our fundamental focus is on Lean manufacturing, through processes such as Six Sigma. These efforts will help us mitigate the effects of slow market segments, and enable us to quickly and profitably capitalize on market opportunities. We will continue to aggressively integrate our acquisitions, and drive these businesses to the Agilent operating model. While we know there is potential for the macroeconomic issues facing Agilent, we believe we are well-positioned to capitalize on market opportunities in any region of the world.

We are off to a solid start in delivering revenue and profit from our strategic growth initiatives, and we are committed to leveraging Agilent's operating model. Thank you for being on the call today.

Now I will turn it over to

Thank you, Bill. Good afternoon, everyone. I am going to offer 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 2008 guidance. Then we will turn it back to Rodney for Q&A.

Overall, Agilent's first quarter was very much in-line with our expectations, with performance that was better balanced between segments and geographies than we have seen in several quarters. The BioAnalytical markets showed sustained momentum with orders up 20%, and revenues up 15% from last year, the seventh consecutive quarter of double-digit growth.

Both Life Sciences and Chemical Analysis Markets in all geographies were up double-digits as well. Stratagene was responsible for about 5 points of segment revenue growth. After several tough quarters, Electronic Measurement Markets showed a bit of recovery in Q1, with orders up 8%, revenues up 5%, and the handset manufacturing test market up 11% from one year ago.

Overall, first quarter revenues of $1.39 billion, were up 9% from last year, and up 6% in local currency terms. Operating earnings of $0.42 per share were near the top of our $0.38 to $0.43 guidance range. Cash generation managed to stay barely positive in the first quarter, in addition to the normal seasonal weakness, the shift in our compensation/reward cycle into Q1, and a front-loaded tax payment, reduced operating cash by $127 million in the quarter, leaving us at a positive $4 million of cash generated from operations.

Working capital continued to be a strength with receivables DSOs at 47, equal to last year, and inventories 3 days lower, at 99 days on hand. During the period, we repurchased $237 million of stock, and issued $69 million of new shares under our Employee Stock Plans. We also spent $113 million on acquisitions during the quarter, and nearly $400 million over the past year on acquisitions.

Despite that additional invested capital, which at this point is modestly diluting earnings, our return on invested capital was unchanged from last year at 23%. We ended the quarter with net cash of $1 billion. In short, despite an uncertain economic environment, Agilent performed well, meeting near term performance commitments, while continuing to make investments that build on our core, and leverage our operating model.

Okay turning to the overall numbers, we had orders of $1.40 billion, up 12% from last year, excluding Stratagene, orders were up 10% from last year. Electronic Measurement orders were up 8%, Bio-Analytical orders up 20%. First quarter revenues of $1.39 billion were 9% above last year, or up 7% excluding Stratagene. The Americas revenues were up 5%, Europe was up 13%, Asia Pacific revenues were up 9% from last year.

More on this later, but as you think about economic uncertainty, note that the U.S. represented only about 31% of total Agilent revenues during the first quarter. As I mentioned, the weak dollar boosted revenue growth by about 3 points compared to one year ago. Expenses rose by an equivalent amount, so currency had no material net impact on our bottom line in this quarter.

Gross margins at 56% were 0.5 point improved from last year, with both segments up about the same amount. Electronic Measurements at 57.3% gross margins, and Bio-Analytical at 54% gross margins.

Operating expenses during the quarter were up about 11% from last year as reported, with currency responsible for about 4 points of that growth, and the addition of Stratagene for another 3 points. Adjust for the $21 million increase caused by the change in the timing of our compensation awards cycle, and actual discretionary operating expenses were essentially flat with last year, up only $1 million.

As reported, R&D was $174 million, or 12.5% of revenues essentially flat the from last year. SG&A at $412 million was up 12% from last year, and that is where you would see most of the impact of the higher, or of the changed compensation awards cycle. That is at 29.5% of revenue. The Company's operating margin at 13.9% was down 0.4 of a point from last year, with all of that decline due to the dilutive impact of Stratagene. Excluding Stratagene, our operating margin was 14.3%.

Other net income was down $17 million from last year, entirely because of reduced interest income, as our net cash has been reduced by over $1 billion over the past year, and as interest rates have fallen sharply, over 300 basis points. Our effective tax rate was 1 point improved from last year at 22%. Our pro forma net income of $160 million, or $0.42 per share, compares to $0.39 per share one year ago.

Okay moving from earnings to cash. Page 4 of our Press Release financial tables provides a detailed reconciliation from non-GAAP to GAAP income summarizing, we had restructuring related expenses of $11 million, and we believe that that number for all of 2008 will be $25 million, as we complete the previous programs. Share based compensation was $30 million during the quarter, and we are still on track for $85 million for all of 2008, down from nearly $140 million last year. Non-cash amortization was $16 million, and we had a tax benefit, a net tax benefit of $17 million. Getting to GAAP income of $120 million, or $0.31 per share.

Recall that in last year's results, we had a $50 million extraordinary tax gain in the GAAP results. That explains more than 100% of the year-to-year delta in our earnings. One note on the tax rate, you will notice that our GAAP tax rate in the first quarter was about 18%, compared to our pro forma tax rate of 22%. It turns out we were a bit premature on the total exhaustion of our U.S. deferred tax assets. We now expect our GAAP tax rate this year to be in the 18 to 20 % range, as we utilize the remaining tax credits this year.

Turning to cash, I have already mentioned the good working capital performance, with inventory days on hand at 99, 3 days better than last year, and receivable days outstanding at 47, unchanged from last year. CapEx in the first quarter was $34 million, that compares to depreciation and amortization of $49 million.

We had acquisitions of $113 million and during the quarter, we repurchased 6.6 million shares for $237 million, and we issued 3.5 million shares, generating $69 million for options exercises, our annual payout on the long-term performance plan, and the semi-annual Employee Stock Purchase Plan. We finished the quarter with cash and short-term investments of $1.56 billion.

Okay, turning to Segments. The double-digit momentum in Bio-Analytical Measurement continued for the seventh consecutive quarter in Q1, with orders up 20% from the year ago, and up 14% excluding the impact of the acquisition of Stratagene. Revenues of $557 million were up 15% from last year, and up 10% excluding Stratagene. Growth was robust across both Life Sciences and Chemical Analysis, and in all geographies, with the Americas up 14%, and both Europe and Asia up 16% from one year ago.

China and India were particularly hot, up 41% and 51% respectively. It is also probably worth noting that in this years first quarter, Bio-Analytical Measurement constituted about 40% of Agilent's total revenues, and 53% of Agilent's total operating profits. Life Sciences revenues of $241 million were up 24% from last year, and 11% higher excluding Stratagene. Revenue from the pharma and biotech markets was up 11% year-over-year, and the main things that we have talked about in prior quarters continued. Pressures on big pharma from drugs coming off patent, and escalating regulatory pressures.

We continue to see the offshoring of research centers and outsourcing to CROs and CMOs in Asia, where we are particularly well-situated. While year-end capital spending was relatively soft by U.S. Pharma, Asian and CROs and CMOs continued to spend aggressively, hence our very aggressive growth in those two regions. The Japanese market was also soft, but we are seeing more pharma CRO business moving from Japan to China, where we had very solid growth.

In the academic and government markets, we continue to perform well in a modestly growing market, growing 14% organically, and nearly doubled including Stratagene. Academic research is moving toward the use of high end mass spec instrumentation, to answer complex biological questions, and enhance research on protein, peptides, and small molecules. As such we are seeing sustained demand in our 1200 series LC platform, LC/MS, high density microarrays, HPLC columns, and associated services. We are also seeing strong demand in Life Sciences for GC, GC/MS, and ICP-MS based-solutions, with the accelerated adoption of our 7890 GC platform.

Turning to Chemical Analysis, revenues were up 9% year-over-year, and $316 million reflecting 11% growth in Chemical Analysis, and a decline in our material science markets. We are seeing continued strong market acceptance of our new 7890 series Gas Chromatograph, and our 5975 GC/MS. Asia in particular is seeing explosive growth, and Agilent is obviously well-positioned there.

Revenue in the food safety market was up over 20% year-over-year for the third consecutive quarter. This growth continues to be driven by demand from developing countries such as China, Malaysia, Thailand, and India. The Chinese government has reemphasized their plan to revise their national standards for food testing methods, to better align with international standards. Another growth market in China, another growth driver in China, is the intensifying pressure from the U.S. to shift the responsibility for testing for imported food to the country of origin.

Petrochemical was up 8% from last year on strong replacement demand in the developed nations, and plant expansion in China, Russia, eastern Europe, and the Middle East. Environmental was also up 8%, with new solid waste and water regulations driving investments in developing countries. Forensics was up only about 1% from last year, and it has been impacted by a reduction in U.S. funding at the Federal, State and local levels, while Material Science revenue was down 3% year-over-year, driven by a drop in our lithography business.

Segment profits of $102 million, was $9 million above last year, on a $73 million increase in revenues. Stratagene increased revenues by $24 million, and reduced segment profits by $2 million during the period. In addition, the change in the compensation/reward cycle reduced reported segment profits in this quarter by $7 million. Adjusting for both of these factors, the segment generated $0.37 of profit for every incremental revenue dollar in the first quarter. Operating margins were 1 point lower than last year at 18%, while segment ROIC fell 8 points to 27%, due to the impact of acquisitions made over the past year.

Turning now to Electronic Measurement, in the Electronic Measurement segment, we saw more balanced growth for the first time in a year. Orders of $843 million were 8% above one year ago, the strongest rise in two years, and revenues were up 5% to $836 million. Both general purpose and communications were up 5%. Geographically the Americas were up 1%, Europe 11%, and Asia 6% ahead of one year ago.

General purpose revenues at $496 million, at Aerospace and Defense where we have had a focused growth initiative for Agilent, we saw first quarter revenues up nearly 20% from one year ago. We experienced steady growth in the U.S. and notable strength in both the European And Japanese markets.

Intelligence, Surveillance & Reconnaissance markets remained strong applications for RF content, other RF applications include shipboard and space-based radar, as well as communications and networking. We are continuing to make investments in wideband signal analysis solutions, with increased focus on higher bandwidth, enhanced calibration of the front end, and pulse Measurement for radar and military communications applications.

Computers and Semiconductor were down 13% this quarter compared to last year, because of a significant decline in the parametric test business. Overall the digital market appears pretty flat, but we are currently introducing two new scope lines, that we anticipate will get good traction in the immediately upcoming quarters. Other general purpose test markets experienced mixed trends with steady growth in basic instruments, and continued pressure from the EMS marketplace.

Communications Test revenue was up 5% year-over-year, to $340 million, with strength lead by wireless handset R&D and manufacturing, as well as broadband R&D and manufacturing. Weakness in the Communication market was isolated to our Network Monitoring business. Building our position in wireless handset R&D has been another Agilent growth initiative, and first quarter revenues were up 11% from last year. We are seeing steady demand for WiMAX and Wi-LAN platforms, as well as continued interest in new cellular technologies that compete with WiMAX, specifically LTE and UMB, which is still in it's early R&D phase.

R&D investment continues to be focused on high speed applications, such as with 1X EVDO, W-CDMA, and UMTS, and testing more specialized areas, such as pre-conformance testing and interoperability testing. After a tough 2007, our Wireless Handset manufacturing business was up 11% in the first quarter, while the market will remain competitive, we expect this recovery will be sustained throughout 2008.

Network monitoring continued to struggle in a tough Telecom market, and was down 18% year-over-year. Broadband R&D and manufacturing on the other hand had a strong quarter, with revenues up 25%. We are seeing increased orders from NEMs worldwide, driven by the convergence of an all-IP-based network, for service delivery including video, voice, data, and mobile services.

First quarter operating profits of $95 million were up $5 million from last year, on a $40 million increase in revenues. The change in the compensation cycle reduced segment profits by about $14 million, meaning that the apples-to-apples incremental operating margin was about 48%. As reported, gross margins were up about 0.5 point, while operating margins were flat versus last year at 11.3%. Aggressive asset management enabled segment ROIC to improve 2 points to 20%.

Finishing up with guidance. I want to reinforce Bill's comment that we are cautiously optimistic based on our first quarter results and orders. Agilent is a far better balanced company than historically, with a much more flexible and scalable operating model, and today only 31% of Agilent's revenues come directly from U.S. markets.

I want to be clear that we don't believe that any Company can consider itself immune to a downturn, but we did plan conservatively, and most of the U.S. markets that we participate in, such as Aerospace Defense, Wireless R&D, Pharma, and QA/QC, are not particularly cyclical sensitive, and for Handset Manufacturing test, which is cyclical, we had our turn in the barrel last year when the market was down 15%. There are certainly no guarantees, but we think this market will be up this year, and as Bill said, we will continue to watch markets closely, and make rapid adjustments as required, to keep our resources focused and our costs in-line.

So we have not made any changes to our outlook for the second quarter, or for the full year 2008. For Q2, we expect revenues of 1.4 to $1.45 billion, up 6 to 10% from one year ago. Adjusted net income is expected to be in a range of $0.46 to $0.50 per share, $0.07 to $0.16 above last year. We remain comfortable with the range of 2008 Analyst estimates, for revenues and for operating earnings per share.

Two other comments before handing it back to Rodney. A reasonable question is when Stratagene will complete the initial integration activities and turn profitable. We expect that to occur in the second half of 2008. The other has to do with seasonality.

Last year, we had a spectacular second quarter, and a relatively disappointing fourth quarter. We expect more normal seasonality in our operating performance this year, so some of you may want to revisit the seasonality in your models. Again, we performed very close to expectations in the first quarter, and we have made no changes to our quarterly or annual forecast for the remainder of this year.

With that, let me turn it back to Rodney.

Thanks, Adrian. Michelle, I would like for you to go ahead and give instructions for the Q&A.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Jon Wood of Banc of America Securities. Please proceed.

Okay, thanks. The acquisition related outflow of $113 million, is that solely related to the Velocity11 acquisition?

Not solely, but the vast majority, yes.

Okay, could you give us a sense of the revenue run rate and margin profile of that asset?

No. We don't provide that kind of information on a relatively small acquisition.

Okay.

But we are very pleased with the acquisition of Velocity11, and I think with our brand name and our reach around the world, that this acquisition will also be able to immediately bring value to Agilent.

Okay. Can you offer some detail on the relative weakness in U.S. Pharma biotech that you mentioned? Was the softness softness concentrated in any specific product line, or was it basically across the board?

Most of the softness was in the core instrumentation service support and [inaudible-microphone inaccessible], and again, our growth rate isn't so hot in these areas, so there is any place that that is where it was.

And it seems as if various competitors experienced some weakness in Europe yet it doesn't seem like you saw that. How have the order trends looked in Europe within Bio-Analytical?

It has been fine. We have had steady robust growth in Europe. And I think some of what you may be seeing is a little bit of competitive activity across different geographies, but we have seen steady growth in Europe.

Okay. And then can you just comment on the M&A environment in Life Sciences? Has it changed at all in the last three to six months? Are you seeing more opportunities, better valuations, or is it largely consistent with '07?

It has really been very consistent with '07.

Okay.

Again, a lot of the mid-range companies have been acquired over the last [inaudible-microphone inaccessible].

Okay, thanks a lot.

Your next question comes from the line of Rob Mason of Robert W. Baird. Please proceed.

Yes, just a couple of things. You know, Adrian maybe this gets to your seasonality comment there at the end, but with sales projected as they are in the second quarter, it looks like your operating margin expansion, if I am doing the math correctly, would be about flat. One I guess is that correct, and if so, why are we not seeing a little more expansion there given that we should have, as we think about this, a little bit of a tailwind on the shift in compensation cycle?

Your arithmetic is just about correct, and again, I would emphasize that last year second quarter was simply spectacular, if you look at that quarter, operating margin at 15.1%, that was up over 1.5 points from the prior second quarter in '06.

We just had a blowout second quarter because we had put all of the brakes on anticipating weakness in the Electronic Measurement segment, and conversely, that's what happened and you will recall in the fourth quarter we had a relatively disappointing result, so I would if you compare your two year seasonals, I think that we have a better, more accurate reflection of what we are expecting this year, than if you just look at the second quarter of 2007.

Again, as Adrian said in his comments, we have made no fundamental change to our plan of record in 2008, which is tied directly to the compensation of our top management team.

One other point, as many of you noted we are doing some acquisitions, and we don't break out information on how much we are spending on those acquisitions, and how much we will otherwise be earning. You can assume that we are spending money and as we illustrated in diluting earnings, we do we do expect that to turnaround in the second half of the year.

Your next question comes from the line of Terence Whalen, Citi Investment Research.

Thanks for taking my question, and nice job in a tough environment. My first question relates to the comments that you made around semi and computer down 13%. You said parametric test remained weak this quarter. I was wondering if you could delineate between what you are seeing, in terms of revenue and orders in that market, and what the your expectations are over the next several quarters?

In terms of the semiconductor market, it is a tough environment for us, again, we don't have a large presence in semiconductor manufacturing, but as you know, we have a very high market share in parametric test. I think the expectation is this will be a difficult market for the remainder of the year, which always hopefully brings it into the second half, but this is an example where we have seen a substantial slowdown in parametric test, yet it still seems profitable, because of the variable cost structure that the they have made in place.

In terms of Electronic Measurement, again, we talked a little bit about this during the Analyst meeting and previous calls. The pressure on contract manufacturing in this segment is very, very large, coupled with that, with some of the very large mergers that the are going on, it is a difficult environment overall.

We have restructured that team as we have said. We have basically moved the center of our support into Asia, and we are aggressively looking for alternate submarket segments for us to be able to maintain our position, again this business is profitable, but it is clearly a tough environment.

Great, and then a follow-up if I could on Life Sciences, I think you mentioned about 41% China growth, 51% India growth. What are you setting your plan toward going forward, obviously those are lofty numbers. Do we expect those to moderate over the next several quarters? Thank you.

Well, yes, I would say we had not planned on quite that velocity of growth in the first quarter, and we did not build our plans based on 40 to 50% growth, but again as we showed at the Analyst Meeting, we have been assuming very substantial growth in those two regions, and if anything, the growth is exceeding our expectations, and certainly bolstering both our top and bottom line.

Thanks.

Just getting back from India and Asia, there is clearly enormous opportunity for us to continue to grow, as we bring on more resources to really be able to support a very dynamic and fast growing customer base.

Thank you.

Your next question comes from the line of Will Stein of Credit Suisse.

Thanks. Good afternoon. Hi, guys. Bio-Analytic I think is now over 50% of operating profit, at least it was in this quarter.

53% of total profits.

So do we expect that, I know that this is a somewhat seasonal thing, but do we expect that to be the case for the full year perhaps, or is that shift maybe more year round?

I will let Adrian talk from a financial standpoint, but needless to say there is enormous pressure on the Electronic Measurement side to reset moving forward, obviously they have a couple segments that as we discussed, Semiconductor contract manufacturing, but if you look at our core wireless business in Electronic Measurement, it is very, very competitive, and again, the opportunity in Electronic Measurement is demanded through some of the tougher segments , the Analytical part of the world basically today has no real weak

To answer your question, Will, I expect that Electronic Measurement will be boasting a quarter from now, and that the permanent shift will occur next year.

Okay, great. And then regarding the weak markets that you mentioned, Bill , Semi and EMS, is there any potential share loss going on there? I mean those guys are under tremendous pressure obviously, that their business models are just not as robust as maybe some of your other customers, and I am wondering if there are competitive pressures that are causing Agilent perhaps to lose share to lower cost alternatives, and then whether or not that is the case, do you have any anticipated timeframe of a turnaround of those markets for you

First of all, we have no evidence of market share, and we are aggressively restructuring the businesses, to make sure that we are still cost competitive, which is obviously any time you have a tough market, there is pressure on margin, but again as you know, our record speaks for itself.

We moved very aggressively to insure that we have a cost effective operating model, to be able to compete in these markets. Particularly in parametric test we have no data whatsoever we have lost any business. It is just a tough environment, and I think one would assume that it is going to continue for the rest of the year, do we imagine it is going to get worse? We don't know, but it can be flat and for the rest of the year, get an upside at the end of the year that is great, but our plan does not count on that.

Okay, and maybe Adrian if I could get one quick maintenance question in here. It looks like restricted cash went from current assets to long term, is that right, or the other way around? It switched the grouping, and I am wondering if you can comment why that happened?

Yes. The restricted cash went from long term to short-term, as did the debt. That the is because there is a call on that, that is less than 365 days, which forces us to move the liability up into current liability, and move the restricted cash up as well.

Great, thank you.

Your next question comes from the line of Deane Dray of Goldman Sachs. Please proceed.

Thank you, good afternoon.

Hi, Deane.

The question on your overall guidance and my, it was clear in your press release and prepared remarks, you talked about that you are making no changes to your outlook, but I just counted up where four different times in your prepared remarks, you referred to the difficult economic environment, macro issues, and uncertain, economic uncertainty, and so fourth.

So clearly, it has changed in the last since three months ago when you last updated guidance, so the first question is, how is it that you are saying that you haven't changed your outlook, given your concerns about the economic environment, and we don't see it in the numbers yet, so where else are you seeing it, and very specifically and how do you think this plays out?

Deane again, one thing that I do and Adrian does, is we constantly travel around the world to take a read on the economic environment, so you are getting a view from our perspective, and I will share those thoughts in a moment.

Again, the news print, the newspapers are an overwhelming amount, of what I would call cyclical noise, of a potential economic slowdown, for us to dismiss that out of hand, given that no one knows what the world is going to look like in six months to a year, I think would just be foolish, but let me talk about, and I just completed a world tour over the last, from the end of December to January, and the first thing you do is you of course visit all of the top Managers and CEOs of your customers around the world. No evidence of any additional slowdown, other than the troubled markets that we have already discussed. All the feedback we have received, business is okay to good.

Second thing we constantly look at, is what is their behavior. In the Capital markets there are usually two behaviors. The first one is, how hard is it to get a PO signed? How many signatures are there to get a PO signed in a company, and sure enough if you look at the markets that in fact are having some difficulty, there are more people having to sign off, the time to get the PO approved is longer. We have not seen that in a lot of our growth markets that we have just described, a change in behavior, on how acquisitions and capital investments are made.

The second thing we look for and I look for particularly is when does the CEO send out a mandate that all capital spending stops on Monday. Because again that is always the danger in the future if there is enough economic uncertainty or crisis, people will stop spending money.

We have seen no evidence to-date of any of that happening through our view of the world, and just my personal travels, as well as the feedback that we have received from our thousands of direct salespeople around the world. So again, we cannot dismiss the rhetoric particularly in the United States in terms of concerns, and so we are acting prudently, and the flip side of it is, other than the 12 documented industries that are having some difficulties, we have not seen evidence of problems in any of the other sub-markets that we have described.

Let me add one little bit of color to that as well. The main difference between three months ago and today is that three months ago, some folks were forecasting weakness, and today, it is all over the papers, and so for us not the to address that would be irresponsible.

But we have planned conservatively, and so our numbers haven't changed, because our numbers have come in very much like we anticipated they would, and despite whatever weakness there was in the U.S, it still grew 5%, and worldwide our orders were up 12%, so I think it illustrates the stability of the markets we participate in in the U.S. As well as the robustness of the rest of the economic environment, but again, the point we are trying to make, and maybe we are belaboring it, is we are focused on this, and we have the flexibility and scalability to adapt, no matter what happens.

That is very helpful, and Bill as you kind of clicked through the leading indicators of where you might see softness, one of the ones that we remember from the last downturn is debooking, or order push outs. Anything like that?

Other than the contract manufacturing. I mean the places where we have identified with, that is where you will have the noise, particularly given that two of the larger contract manufacturers are in the process of merging.

Got it.

So again, outside of the areas that we identified by ourselves and the industry, we have not seen that behavior in the other markets, we are seeing some pretty healthy growth.

If we could just switch into a specific business on handset test, Bill you talked before that you thought maybe that business had bottomed, and you got 11% growth this quarter, and then Adrian, you thought that it would be a sustained recovery, and hope for sustained recovery in '08. Does that outlook also reflect the changes in the business model for the industry moving to more low cost, low feature phones, which then have a lower revenue opportunity in test? How much has that changed, and how does that change your outlook?

Well, again, I think that our outlook hasn't changed at all since our last call, people are putting enormous pressure on eliminating call processing. We are all over that change. We do have easy compares, because of the drop that we saw last year, and I think the big one is again, our Wireless Manufacturing is only 6% now of the Company.

The R&D research market in this space is we believe at least three times larger than the Wireless Manufacturing, so you are getting a market where you hopefully hit the test scope, and on the existing technology expansions, it is opportunity for us for software upgrades, and all of the things that the go on it, new feature sets get put in, and then you have got the new standards coming in, that will in fact have a lower cost base, and again we will be prepared to be able to capitalize on that.

But you can see and you can see the growth in our Wireless side, and the announcements we have made in WiMAX and LTE, we are absolutely be committed to be a leader with our partners [inaudible], to be a leader in protocol test, and we really believe that is the big opportunity today, and the teams are executing very, very well.

Great. And then a question on Network Monitoring. That got called out in the release as an area of softness. Is it too early to tell yet with the ownership change with Tektronix and Inet, whether some of the economic or competitive headwinds you have been dealing with, has that changed at all, has it worsened, and how do you think this plays out?

Well again, we wouldn't make any comments on how that is going from our competitors standpoint. Our task first of all is to get back to profitability. We have done that. We have successfully divested part of the businesses, and that is complete. We are defining on Internet Protocol opportunities, and at the end of the the day, we have to outcompete not only the direct competitor that you mentioned, but as well as other competitors in this space, and that is the task of your team.

You are profitable now in Network Monitoring?

Yes.

What businesses were divested? What functions?

They were small installation maintenance related businesses in that Monitoring space.

Got it, thank you.

Your next question comes from the line of Jon Groberg of Merrill Lynch.

Good evening, thanks for taking the call.

Hi, Jon.

So, Bill, I am going to put you on the spot for just a second on your discussion, I would like to talk about what customers are doing, but what is Agilent doing? Have you guys increased the number of signatures needed for POs, and are you pulling back any Capital Expenditures?

Well first of all in terms of capital investments, we are a very low capital required Company and in fact about 80% of the capital that we use inside the Company is our own test equipment, so from that perspective, even though I am notoriously frugal, that is not a major issue.

In terms of our hiring, which is our biggest expense, we have very, very tight controls on spending, insuring that the parts of the business that have opportunity are resourced, and again, this ability for us to reallocate resources, I believe, is actually in some cases quite different than our competitors, as you I think you noted, we have two very large direct salesforces, and so our ability to direct the 5,200 people we have in Sales and Marketing support to the opportunities, can be done almost instantaneously.

Likewise, we have essentially 10 or 12 major instrument platforms that support these markets, and how quickly can we reconfigure these instruments with the applications required, is really one of the strengths of Agilent moving forward, and then you couple that with having a much, much higher variable spending that will automatically self-correct, depending on what our actual performance is, I believe that we are well-positioned, but we are being very conservative, and looking at decreasing our headcount, except for the acquisitions that we have made.

That is what I was wondering, because these things can become, if no one sees it out, it can become a self-fulfilling prophecy. [multiple speakers]

We did plan conservatively going into the year, and we are continuing to be conservative and let the revenues lead the expenses.

Okay. And a quick question on a few of your Bio-Analytical businesses. You talked a lot about the Electronics side, and I think we can all kind of imagine the pressures that may materialize throughout the year, if things go as they are, but on the Bio-Analytical side, you have also given your Chemical Analysis business has quite a bit of what you might term industrial exposure, and I am just curious if you are seeing anything on the commodity side, the petrochemical side, any of those more industrial markets, that is giving you any reason to believe that some of those businesses may slow down?

There is nothing in the two big ones for us, and again, as Adrian detailed it out, the biggest one is petrochemical and their our business is just super strong. I mean the investment that is going in for energy, most of it continues to be fossil fuel, has been very, very strong, and we are well-positioned, and so one could conceive of a macro environment if there is a big slowdown, will people in fact cut down their investment in petrochemical, but it is not clear to me, the demand in India and China and the developing countries, that are overwhelming any minor slowdown that may show up in the U.S.

And so then the other big one of course is food and the environment. The environment is the topic of the day, and the food industry again is a basic human need, so again, we really don't have that exposure you described in the classic industrial base.

And one thing I do want to make sure that is clear, yes, there is pressure in EMG on the manufacturing side. We have dramatically shifted our resources into the Research & Development side, and you can look at the performance, our gross margins continue to improve year-over-year, actually sequentially improve from Q4 to Q3, so we are absolutely committed to focus on the opportunities that will continue to drive our gross margin for our operating model.

And then one more question on the Bio-Analytical you mentioned Stratagene, and you expect it to kind of turn the corner in the second half of the year. Can you maybe just give an update on that was one of your larger acquisitions there in Bio-Analytical, maybe just how the integration has gone, any lessons learned, and then I am also looking forward to future acquisitions, if you can maybe talk about your genetic analysis platform, and whether or not you think there are other things that you need to do, to remain competitive in that fast growing market?

Right. I will make a couple comments, in terms of our work flow, and then turn it over to Adrian to talk about integration since he's been leading the team, to insure we have a seemless integration, and get all of the obvious cost benefits and synergy moving forward, so the task at hand, in terms of Stratagene, of course is to get the team in place, settle all the intellectual property issues we inherited, as has been documented we have in fact completed those, mutually satisfactory to ourselves and the company that there was a previous dispute with, that has now been resolved.

The teams are working closely with our central research lab, in our instrument platforms to identify key differential work flow solutions, and you will be hearing more about that in the second half of the year and into the year 2009. What has been very pleasing to me is we have not lost any revenue since we have acquired the company. So again, it is a real big plus.

In terms of the genomic side, again we have refocused our micro array business into niche applications, that we believe we can drive real value in higher average selling price per array. We have continued to have great acceptance into array-CGH, which is a comparative analysis.

We talked about being the first company to be able to measure micro RNAs, and we are really focusing on applications, that we can really provide a differential contribution to the marketplace, and the net result is that our growth in microarrays continues to be solid double-digits, plus that, we are back when this used to be a big money loser for the Company, we are back into the breakeven to going positive, given the focus we have in differential applications, and I think that is the key. We are about differentiation, not just being a need to to somebody else, so very pleased with the direction, still have a lot of work to go, but again based on that basis we will continue to try to expand our product offering.

Jon as far as the integration, it has been going very well. We knew we had to succeed here. We knew it wasn't just a fold-in, and we took it very seriously, we set up a full-time project team. We meet as a Steering Committee every other week, and we have a very detailed project plan, that has been ongoing now for about just over six months.

At this point, virtually all of the integration of the back end of the infrastructure of the finance and the governance has been completed, but we will finish that up in the second quarter, but it has gone extremely well, and from a back office perspective we have gotten all of the synergies that we had intended and planned for when we made the acquisition.

We have also gotten some good talent from that acquisition, such as for example, the Head of Stratagene sales is now the Head of all of the Americas sales for the Bio-Analytical segment, so we really are picking the best from both sides, integrating the back office, and now we can begin to focus on the real value from this acquisition, which is the front end synergies taking their instruments into our traditional channel, and taking our instruments into their traditional government and academic channel, and creating the kind of distinctive creations that work best with our instruments, and create a unique workflow, that customers are willing to pay for, so that is the opportunity ahead.

Great and just two quick detailed questions. Adrian, could you tell us what the local currency is sort of X-currency impact was contribution for each of the divisions? And then the settlement that you alluded to with Invitrogen, is that just a part of your results, or will you categorize that as a one-time kind of issue in the second quarter?

I think it is done. It has already been accounted for.

That one has been accounted for. And the local currency?

The local currency, the impact on revenue growth in Electronic Measurement was about 2 points, and for Bio-Analytical it was about 4 points.

Thanks.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of David Chung of Lehman Brothers.

Thanks very much. You did talk about food safety, again that was very strong, you had three quarters of over 20% growth, just wondering if you continue to see that as a good run rate for the rest of the year? And secondly, if you kind of think about you made comments talking about China and this change to increasing the standards. How long does that whole process play out, if you could provide some comments on that?

Again, with all of the caveats, I am not sure our crystal ball is any better than anyone else's, but this whole issue of food, food safety, the comments that Adrian made about trying to drive conformance of food safety back into the country of origin, this whole new movement on food authenticity, the food that you eat in a restaurant, is it really what it says on the menu, we believe that will continue.

In terms of China, given their issues they had with their Federal Drug Administration, of which there were severe scandals, actually China had slowed down, and now that that's back under control, and obviously renewed focus to be able to address some of the issues they have, we don't see any, there is no reason for us to believe that there will be a fundamental slowdown in the market, it is up to us to compete and provide the best solution.

We have also continued to expand our teams in Shanghai, to have more regionally local based instruments, trying to localize to their needs and again, we are, that has been going very well and all, so again, I don't have the absolute crystal ball, but there is no evidence of a slowdown in China.

Thanks, and I was just wondering if you could either talk about some good growth in Japan. I was wondering if you could provide some comments on the mass spec side. How is that looking in Japan?

Well, the problem is that our base is pretty small, so the number looks good. We have got a lot of work to do in Japan. One of our strongest competitors is Japanese, but again, we will continue to compete, but in absolute percent, the growth was very high, but I think, in terms of not measurable for the Company.

Yes, but could you comment a little bit on the overall market, and how that is looking in general? From your perspective how does that look?

The market in Japan generally has been slow growth, and we have been increasing our share as Bill mentioned, because we have been essentially a new entrant on the mass spec side.

On the ICP-MS side there has been pretty good strength, as we consolidate our 100% ownership of that business, and part of what is also going along as I think I mentioned in my comments, is that there is some transfer going on from Japan to China, and we see both sides of that hand-off, and it is part of the reason for the underlying strength that we are seeing in our China business, as that the activity has transferred from Japan pharma, to CROs and CMOs in China.

Great, thanks very much.

Your next question is a follow-up from the line of Jon Wood of Banc of America Securities. Please proceed.

Thanks. You mentioned that 21 million of comps shifted into Q1, yet on the last call, I believe you forecasted for 32 million. Am I looking at the right apples-to-apples numbers there?

You are, Jon. We overestimated what we thought would be the size and the distribution of the comp, it turned out to be closer to 21.

Okay. So, could that be driving some of the confusion on the Q2 '08 EPS guidance, and therefore less of a benefit, if you will?

Only you know what is in your models, but that certainly could be the case. We would say at this point, that Q2 benefit is more in-line of $0.02 to $0.025, with the remainder being in the second half.

Okay. All right, thanks a lot.

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

Yes, good afternoon. A couple of quick questions. I think the first one, just looking at your margins, you have talked about how most of the sort of decline in margins associated with Stratagene, and you have also talked about the expense line increasing because of currency, but excluding the impact of those two, could you give us some color, as to whether you are seeing in any inflationary pressures, either in wage in local currency terms, or in raw materials, over the past three to four months, a trend that you see continuing?

No, we have seen no change in the trend of wage increases or inflationary pressures around the world, once you take out the impact of currency.

Okay.

And we have also mentioned historically from our legacy, it tends to be a high fixed cost company, and over the last few years, and this year is the first full year that we have consciously increased the variable component of our pay, which is applied to the performance of the Company, which needless to say puts less pressure on our fixed cost structure.

Got it. And then when you are looking at the growth that you have seen in China and India, I think could you give us if you do have some color, could you give us color as to how much of that is driven by sort of local demand, and how much of that is driven by sort of export oriented demand? For example, the food shifting back, food testing back to China would be considered export oriented, so very broadly, do you have some color on that?

In terms of India, again, I just got back a few weeks ago from India, and it is obviously the multi-international activity that is going on, but it is an enormous amount of indigenous work going on in terms of the generic, the contract research organizations moving forward, and even in a lot of the food safety, government what not, we are seeing really solid growth and again, that is why we have been expanding our resources so rapidly, for example, where they were just opening up what will be the largest analytical lab for Agilent in Bangalore, we have a grand opening, so it is a real mix between the multi-international, as well as the local.

In terms of China, again a lot of it is multi-international, and the corresponding contractors and smaller companies that support that effort, of course, that moves forward you are seeing emerges of many of the larger Telecom companies, and obviously a lot of investment by the government, from the Olympics, to their Environmental Protection Agency, into their Food and Drug Administration to help drive this, but again, I don't have the absolute numbers in my mind, but I would think that India is slightly ahead, indigenously versus China, but again, that is just a guess on my part.

Okay. Just looking at your Network Monitoring business, could you give us some idea as to what the catalyst would be, not necessarily for Agilent per se, but for the overall spending and that Asia had increased, and what the mix is on the wireless, between wireless and wireline there?

Yes the catalyst is the conversion to an all-IP Network, which basically wireless and wireline technically will be transparent, right? I mean you will have this internet protocol other than data collection points, so to speak, and so that is the change, it is a much harder network to assure quality of insurance, but when you have a dramatically increasing ability to generate more data, how does that data get managed, how do you analyze the data, so that is the big opportunity that we see, and our competitors see as well.

When do you expect that to start taking off?

Oh, it is already progressing. It is already progressing now. And the one that you read about the most is the whole [IP-PBX] and that's where a lot of the investment is, but you are seeing it across the Board as people migrate their networks, and again, those things always are slower than you expect, where the networks today are still dominated by ATM, but again, in terms of it is in the process of happening.

Okay, and then the 237 million used up in share purchases, could you give us an idea of what the average share price was, and then also, what the strategy there is on a go forward basis, and the ending share count at the end of the quarter?

The average share price in the quarter was roughly 35, and we ended up at 382 million shares at the end of the quarter.

Okay, and going forward do you continue to expect to be aggressive in the share buyback?

Going forward, you should assume we will do a $1 billion annual rate, and we will take advantage of [inaudible], but not try to be too clever about it.

Okay and the restricted cash that you shifted to the short-term, are there any tax implications, in case you have a call over there, I think some of the cash is restricted overseas?

No.

Okay.

That cash is restricted to the debt, the 1.6 is the over-collateralized cash restricted for the $1.5 billion debt.

Both of them once you move to the current, in case there's a call on the debt, is there anything, I mean you can satisfy it locally as well?

Yes.

Okay. Thank you so much.

Your final question is a follow-up from the line of Will Stein.

Thanks, guys. Just curious about the stock comp expense in the quarter. I think it came in a little bit higher than we expected, and I am wondering what we should expect that to be going forward?

Well, it came in exactly as we thought it would. It was $30 million.

Okay.

And we expected it to be about 19 million in the second quarter, 18 in the third, and 17 in the fourth, for about $85 million for the year, which is exactly what we had guided three months ago.

Okay I must have missed that, and for fiscal '09, just generally speaking going forward, a similar pattern?

Yes. There is the issue around the Employee Stock Purchase Program, on how the accountants sometimes will require us to in essence double-depreciate the first year, take three-quarters of the expense in the initial year of that, we are not guiding for 2009 yet, but from an economic perspective, you should assume this sort of a pattern.

Great, thank you.

That does conclude our question and answer session. I will now turn it back to Mr. Gonsalves for closing remarks.

Thank you Michelle. With everyone on the line, we want to thank you on behalf of the management team for joining us today. Have a good evening.

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