安捷倫 (A) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 Agilent Technologies earnings conference call. My name is Crystal and I will be your operator for today. At this time all lines are on listen only mode. Later, we will conduct a question and answer session. (Operator Instructions). As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to Ms. Alicia Rodriguez, Vice President, Investor Relations. Please proceed.

Thank you, Crystal. Welcome, everyone, to Agilent's third quarter conference call for fiscal year 2010. With me are Agilent's President and CEO, Bill Sullivan, as well as Senior Vice President and CFO, Didier Hirsch. Joining in our Q&A will be the Presidents of Agilent's Electronic Measurement, Life Sciences and Chemical Analysis Groups, Ron Nersesian, Nick Roelofs, and Mike McMullen. After my comments, Bill will give his perspective on the quarter, and the overall market environment. Didier will then follow with a review of financial results, and after Dieder'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. Please note that we have moved the business segment financial tables to the schedules accompanying the press release. We are also providing further information to supplement today's discussion. After you log on to our webcast module from our website, please click on the link for supporting materials. There you will find additional information such as our revenue break out and historical financial information for Agilent's continuing operations. We have also updated our investor presentation slides with scenarios that encompass the current range of First Call analyst estimates for fiscal year 2011.

Also, 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 metrics. Additionally, I'd like to remind you that we will make forward-looking statements about the future financial performance of the Company. These involve risks and uncertainties that could cause Agilent's results to differ materially from management's current expectations. As a result 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 our guidance provided today during the call are only valid as of this date, and the Company assumes no obligation to update such statements as we move throughout the current quarter. Now let me turn the call over to Bill for his comments.

Thanks, Alicia and hello, everyone. Agilent's latest results are a strong indicator of our continued momentum. Q3 orders of $1.5 billion were up 39% year-over-year, while revenues of $1.4 billion were up 32% from a year ago. Note that these numbers include the results of the Varian acquisition. Without the Varian acquisitions, our divestitures, orders and revenue were up 30% and 24% respectively.

In addition to the top line growth we continued to improve gross margins and our expenses were well controlled. Q3 non-GAAP earnings were $191 million or $0.54 per share. Agilent's third quarter revenue growth was strong across all regions. Excluding acquisitions and divestitures. the Americas were up 25% year-over-year, Europe 18%, and Asia Pacific up 28%. The Varian integration continues to go very well. We have successfully integrated Varian's field, service and support functions into the existing Agilent structure. We've established three new product divisions dedicated to spectroscopy. research products. and vacuum technologies and we've consolidated Varian's consumables with our own consumable business.

Varian's businesses were solidly profitable in Q3. Moving forward we are highly confident we will achieve our goal of $75 million in net savings. This is inclusive of $10 million of additional R&D that we're investing in Varian's technologies as well as our increased investment in service and support. From a market perspective, our third quarter results saw continued strength in most of our key markets that we serve. In our chemical analysis business the applied market recovery continues. Q3 revenues at $329 million were up 62% over last year, up 13% excluding Varian.

Operating margin was 21%. Excluding the Varian acquisition we saw double digit year-over-year growth in petrochemical, environmental and forensic markets. From a product perspective, all product lines posted double digit order growth over a year ago. Our high end mass spec business was especially strong with ICPMS, GCMS, and Agilent's new GC triple quad driving growth in food and environmental applications and our new vacuum products are performing well in response to the improving global economy. We expect future growth to be driven by continued focus on food safety, expanding consumables and mass spec portfolios in the continued successful integration of Varian.

In our life science businesses, revenues of $374 million were up 28% over last year. Adjusting for Varian and the Highcore divestiture, life science revenues were up 15%. Operating margin was 15%. Strengths from emerging markets was offset by softness in Big Pharma consolidation. Excluding divestitures and the Varian acquisition, academic and government revenues grew 21% over last year. We saw a more modest 6% increase in pharma biotech, CRO, and CMO.

Sales of LSG products and services into applied markets were up 20% from a year ago. From a product perspective, sales of life science platforms into food, environmental and other applied markets remain very strong, particularly for the LC and LCMS instruments. LC sales were up 25% year-over-year. The 1290 LC continues to exceed expectations and we introduced the new 1220 and mid range 1260 LCs. Our SureSelect sample prep product offerings also continue to beat expectations.

In electronic measurement, revenues of $692 million were up 24% from a year ago. Excluding the network solutions divestitures, revenues grew 34%. Operating margin of 18% is at the highest level since the early 2000s. We saw strength across all markets and regions. Asia Pacific revenue was up 32%, Europe was up 18% and the Americas were up 18% year-over-year. In industrial markets, we saw broad and consistent growth across multiple industries, driven by the economic recovery and growth in China.

Aerospace and defense improved with spending in the United States and Asia, fueling its 24% growth year-over-year. Communication demand improved with increased spending for new technologies, including LTE and SmartPhones and for 3G expansion in Asia. From a market perspective our network analyzers and oscilloscopes, especially high end scopes were strong in all markets. Network analyzer revenue grew 58% from a year ago while scopes were up 45%. Moving forward, while the economy remains uncertain we continue to see numerous market opportunities and we believe Agilent is in a strong position to capitalize on them.

There are four major areas where we differentiate ourselves. The first is our market reach and customer trust. We are number one in customer loyalty in every major product category in our industry as measured by external benchmarks. With our field team new consisting of more than 6,000 sales and marketing people, we'll continue to invest in customer service and support.

Second is our technology leadership. We currently have the leading technology in every one of our core platforms. Oscilloscopes, signal and spectrum analyzers, network analyzers, gas and liquid chromatography and mass spec. We are committed to drive to the number one position in spectroscopy and NMR, and as we've noted, we are increasing our R&D investment in these areas. We also continue to invest in life science work flow solutions and adjacent market opportunities, including nanotechnology and surveillance.

Third is our scale and scope. Agilent's ability to scale and leverage its manufacturing capability has resulted in the leadership position in the industry. We have 6100 manufacturing employees in every major continent with a proven track record delivering new products to the market and dramatically driving down manufacturing costs. As a result, Agilent today has the lowest instrument cost of sales in the industry while maintaining a reputation of high quality and reliability.

Fourth is our team. We have completed our transformation and we have managed successfully through the recession. Agilent's leaders and employees are able to focus externally on our customers and our market opportunity. As a result, we are in a strong position moving into Q4 and FY11. We are raising our fourth quarter and full year guidance. For the fourth quarter of 2010, we expect revenues of $1.52 billion inclusive of Varian. Non-GAAP earnings are expected to be in the range of $0.58 to $0.59 per share. For the full fiscal year 2010, we expect revenues of $5.4 billion and a non-GAAP earnings of $1.94 to $1.95 per share. Thank you for being on the call. Now I'll turn it over to Didier.

Thank you, Bill, and good afternoon, everyone. I will start by providing additional color on the third quarter results and the fourth quarter outlook. Then I'll give an update on the Varian integration and a perspective on potential scenarios in fiscal year 2011. My comments on the results will focus on the year-over-year comparison and I will report year-over-year top line growth percentages both with and without the Highcore, Network Solutions divestitures and the Varian acquisition, so in other words the organic and inorganic view of order and revenue growth.

So starting with Q3 results. As Bill stated, Agilent delivered strong third quarter results. Those results show that we're delivering on our committment to exit the recession in a much stronger position than when the downturn began. During the downturn, we maintained our large investment in R&D and expanded our channel and reach. We also restructured EMG. We believe we have strengthened an operating model that is a significant competitive advantage in the short and long term.

Orders of $1.5 billion were up 39% from one year ago, both in the dollars and local currency. On an organic basis orders grew 30% with Asia Pacific up 51%, the Americas up 20%, and Europe up 14%. Revenues of $1.4 billion were up 32% in dollars and local currency from one year ago, or 24% on an organic basis. All three business segments generated double digit revenue growth both in total and organically. Geographic revenues on an organic basis were up 28% in Asia Pacific, up 25% in the Americas and grew 18% in Europe. Organic revenue growth in China and India were very solid, at 24% and 43% respectively.

Now moving to the income statement, third quarter non-GAAP operating profit of $251 million was $170 million above one year ago on the $338 million increase in revenue, yielding a 50% operating margin incremental. Excluding Varian, our year-over-year operating margin incremental was 83% with all three segments delivering excellent incrementals. The key factors driving this outstanding year-over-year performance were volume related gross margin incrementals and restructuring savings. These were partly offset by the impact of restoration of full pay and higher variable in incentives. Currency had minimal impact on any of the income statement line item.

Now turning to the individual income statement line items. Third quarter gross margins of 56% were 2.8 points higher than last year. Excluding Varian, gross margins reached an all-time high and improved by 4.2 points over last year or about 2 points on a volume adjusted basis. Third quarter operating expenses increased $49 million mostly due to the impact of the Varian acquisition. Wage restoration and higher variable and incentive pay were offset by restructuring sales. Operating profits of $261 million were up more than 200% from last year. The Company's third quarter operating margin was 18%, an increase of 10 points from one year ago and well above our mid cycle target of 14%. Net other income and expense declined $5 million from last year mostly due to higher interest expenses.

Moving to taxes, we are reducing our fiscal year 2010 non-GAAP tax rate from 20% to 19% which results in a 17.5% tax rate for Q3 and $0.01 additional per share. Non-GAAP net income of $191 million or $0.54 per share compares to $53 million or $0.15 per share one year ago. Turning to the cash flow and the balance sheet. We continue to show outstanding discipline in asset management. Inventory days on hand of 97 days were nine days better than one year ago, $117 million in the higher inventories and increased largely due to the Varian acquisition. Receivable days sales outstanding increased 4 days from one year ago to 50, again primarily due to the Varian acquisition. Total cash from operations was $90 million, an increase of $49 million from one year ago.

During the quarter, we raised $40 million from employee stock programs and repurchased $94 million worth of shares. Year-to-date we've raised $264 million and repurchased $359 million. As you know, we intend to maintain our basic outstanding share count at about 346 million shares while the diluted share count will remain north of 350 million shares depending on the stock price. With regard to net cash, we finished the quarter with net cash of $267 million.

Now let me say a word on the $1.5 billion world trade debt maturing in January. As you know, we had a very successful debt offering on July 13, and raised $750 million. We intend to pay off the world trade debt in its entirety when it matures in January 2011, using the proceeds of the debt offering and cash from our balance sheet. We will incur an additional $5 million in interest expense in Q4 2010 and Q1 2011 but starting in Q2 2011, we will save $7 million per quarter after we delever.

Now, on to the Varian integration. As Bill stated we are making excellent progress in integrating Varian and capitalizing on the revenue and cost synergies that we expected. With our expanded portfolio and capabilities, we have started capturing market opportunities. We also remain committed to the $75 million in cost synergies that we previously communicated, even net of incremental investments in R&D, service and support. On November 1, we will combine all of the Varian and Agilent legal entities. In short we are pleased to confirm that our integration, revenue and cost synergy plans are on track.

Now, turning to the fiscal year 2010 outlook. We expect Agilent Q4 revenues to be about $1.52 billion, 30% above last year, or a 21% growth on an organic basis. Q4 revenues of $1.52 billion would represent an approximate increase of $120 million over Q3 revenue. On an earnings per share basis, we expect a sequential increase of $0.04 to $0.05 above Q3 level of $0.54, leading to an expected Q4 EPS of $0.58 to $0.59.

Now this would represent a somewhat lower sequential and incremental than normal for the following four reasons. First, about $35 million of the sequential revenue increase is for Varian products and services as little incremental as the corresponding increase in gross margin is offset by increased Varian expenses which in Q4 reflect an additional two weeks of expenses over Q3. Second, Q4 earnings per share do not have the $0.01 benefit of the tax true-up that we saw in Q3. Third, Q4 earnings per share reflect the negative carry of the new $750 million debt worth about $0.01 and fourth, Q4 earnings per share include end of semester variable and incentive pay increases of about $0.02, on the back of the semester's projected outstanding results. You will also note that we have added the 3100 plus ex-Varian employees to the program.

On a full year basis, we now expect revenues of roughly $5.4 billion in fiscal year 2010, an increase of 20% over last year, or 18% growth on an organic basis and EPS of $1.94 to $1.95. The new EPS guidance represents an increase of $0.14 over the midpoint of the previous guidance of $1.78 to $1.83 and reflects our commitment to strong incrementals as we continue to deliver on our operating model. Now moving to fiscal year 2011 scenarios, we're currently finalizing our three year strategic plans for review with the Board as we do every year in September. As part of this exercise, we model various economic scenarios and identify triggers and actions that we need to take under different conditions as we have proactively done in the past.

As Alicia mentioned an investor presentation is posted on our website, it includes two scenarios that encompass the current branch of First Call analyst estimates of fiscal year 2011. Under one scenario, our fiscal year 2011 revenues are $6.2 billion, a 15% year-over-year increase or 9% organic growth which in turn would drive an EPS of $2.50. Under the second scenario, fiscal year 2011 revenues would reach $5.9 billion. This is a 10% year-over-year increase or 4% growth on an organic basis, which yields an EPS of $2.50. As Bill stated, we'll provide guidance for fiscal year 2011 in November.

With that I'll turn it over to Alicia for the Q&A.

Thank you, Didier. Crystal, will you please provide the instructions for the Q&A?

Certainly. (Operator Instructions). Your first question comes from the line of Jon Wood with Jefferies. Please proceed.

Thanks a lot. Good afternoon.

Hello.

So Bill, understanding kind of the parameters you laid out for FY 2011 here, can you at least qualitatively walk us through the puts and takes in how you're looking at electronic measurement next year? Obviously we're still way below the peak of 2008 in the current year but cognizant of the headlines we see, can you just kind of talk through some of the positives and negatives on the horizon you see for that business next year?

Right. So first of all, as you can see by our incoming order rate, there's no evidence of a slowdown anywhere in the world or any of our product lines and that right now there's just no evidence of a slowdown. In terms of EMG, and again Ron can add any additional color commentary, the biggest downside potential is for the semiconductor industry which is a small part of our business but real, could in fact, asymptote out going next year.

Offsetting that, we continue to see the investment in LTE. We continue to do exceedingly well in LTE R&D. We continue to do well with the expansion in SmartPhones. We continue to do very well in aerospace and defense, and we do very well across a very broad industrial base. EMG is a much different organization than it was before the last downturn, and so outside of a pause in semiconductor investment, which is a very small part of our business, everything as it stands today looks quite positive. Ron, any additional comments?

I think you hit it right on the head, Bill. The only other thing I would add is that our core products are up dramatically. If you look at our oscilloscopes, network analyzers, signal analyzers and signal sources, they were up 50% in revenue compared to the same quarter a year ago. Also, what we are seeing is more of a shift of our business from wireless manufacturing to wireless R & D and that is a more stable business and that really aligns with the LTE cycle that we're beginning to see. For instance, in China, our wireless R&D business was up 85% this quarter. So overall I think that gives some color commentary to what's going on in EMG.

And as I noted in my comments, given the investment and Didier also mentioned this, we invested substantially during the downturn and we are in the strongest position in our history and products and technically we have the highest performing instrument in every product category in the industry.

Great. That was great. Thanks. One last one on capital deployment. You mentioned still the number one priority for cash is I guess inorganic as well as organic investment. What do you see, Bill, in terms of the acquisition landscape at this point? I mean, should we anticipate you to be active over the next six months or so on the acquisition side?

No, not over the next six months. We must integrate Varian successfully, again I'm very pleased with the progress to date, but I'd be very unrealistic for us to take on a major acquisition over the next six months. Didier said we'll pay down the world trade debt. We'll continue to generate cash, and as you said our number one priority six months or the end of next year is to see what is the right inorganic investment that we can make to continue to drive value for our shareholders, and then of course given our history, we'll return remaining cash to the shareholder.

Is the primary impediment I guess to more repurchases at the moment just the pay off of the world trade debt instrument in January?

Yes.

Okay, thank you.

Your next question comes from the line of William Stein with Credit Suisse. Please proceed.

First just a kind of follow-up on that, one of the last questions around the EMG revenue at some quarters back in fiscal 2008 you were over $900 million revenue quarter. Do you see that as kind of achievable over the next cycle or has anything changed fundamentally in the business or in your position that might make that more difficult?

I'll have Ron make a comment. We divested our network business and so we have a part of the market we no longer participate in, so you would have to discount the high point of our networking business but we are successful in our product strategy, successful in each of these segments, there is no reason why we could not move back to our historic position in all of these product lines.

I think that's exactly correct. The only addition I would make is that we're shifting away from going after some business in manufacturing that is very, it has very low gross margins and low probability in placing more of our portfolio in R & D, so that is why you're seeing very high gross margins of 59% for EMG, and 18% operating profit, even at this level of revenue, slightly below $700 million. So it's not just the revenue line, but our earnings potential is much greater as we shift the mix of our portfolio.

So it seems clear that you believe we're not at or very close to peeking that business. Can you give us an update on the distribution strategy? I understand that as part of the restructuring in EMG, you adopted a bit more of an indirect selling strategy. Can you update us on that?

Sure. Overall, our primary channel to go to the market is our direct sales strategy, but clearly with our direct sales we cannot go ahead and get all of the reach that we want, so we're working very effectively with many partners and accordingly in the last year, we've taken the percentage of our sales and distribution from roughly 9% to about 18%, so it's twice as much of our business on a percentage basis is going through distribution. If you look at it on a dollar basis, our indirect sales were up 89% this last quarter, and that's why you see great growth in product lines such as oscilloscopes, so order growth we stated the revenue growth of 45% but oscilloscope order growth was over 50%, and that's because of the great high performance products that were introduced in April but also because of the lower end scopes that are sold through distribution, so the distribution strategy is working exceptionally well. We've doubled the percentage of business, of our business that goes through distribution and we plan to continue to go much, much further with that as we continue to execute our strategy.

Great and then one short follow-up if I can. Any impact from supply chain issues like component shortages which we've heard so much about from other companies this quarter?

We have had part shortages across almost every one of our product lines. Again, this is an issue in the industry, actually some of the Varian product lines have been impacted even more than some of our product lines in life science for example, or in Ron's business in EMG. The team continues to do a great job of trying to expedite parts moving forward, but it has had a negative impact on our ability to turn these very robust orders into revenue. We will continue to catch up as we move forward in Q4 but we have not been immune to the part shortages.

Thanks, Bill.

Your next question comes from the line of Jon Groberg with Macquarie. Please proceed.

Hi, thanks for taking the questions. Just two questions. First question, can you maybe talk anymore specifically, I guess around Varian and your first priority was to stabilize the orders there, so can you just talk about kind of how that's gone since the acquisition has closed?

Right, and again both Mike and Nick make a comment but the team has done I think just an extraordinary job of integrating the Varian sales team into ours, very quickly. We have put programs in place. We have put to in fact to drive order lead generation, we have put together an extensive training program to insure that Agilent employees or salespeople can sell Varian products, so again, we're early into this but from my perspective, we have made enormous progress which is typically the most difficult part of the process is to integrate the sales organization. Mike, Nick, any additional comments?

Yes, Bill if I could just build on your comments really focusing Jonathan on driving that leverage from the combined salesforce as Bill mentioned, we have some programs that put in place that already are delivering significant incremental leads and are actually closing new business, so really pleased with how the customers respond to the combined portfolio and this combined sales effort is really yielding us results we hope to when we first went down this path.

And this is Nick. I'll just go off Mike's comment. 80 days in we've turned that focus as Mike just pointed to. We got the internal stuff pretty well along, we're looking at the external stuff and now we're fixing customer communications and fixing service and we're really here to stay. We're here to put in the investment, and customers are starting to see it.

And just one kind of clarification. You guys gave some view on what revenues would be for the year with Varian. Any change to that?

Ask the question again, in terms of--

You said you thought Varian would add about 370 million in revenue once it closed for the year. I was curious if there was any change.

Right now, the total number, because of the old Agilent products were in very strong position, because of the part shortages I think that the revenue number will come in roughly $20 million shorter on the Varian side than we anticipated, no material impact in total, but that is happening just because of part shortages and I think there's about another $10 million of revenue that's being absorbed into the Agilent product lines as we notify customers of how we are going to merge some of the overlapping product lines that were not divested, and so I think there will be some smaller impact but again, as we regain the order momentum to the programs that Mike and Nick talked about, I think that we're going to easily offset the $20 million moving forward into FY 2011 and secondly, we aggressively are putting in people and teams to try to expedite the parts coming in so that we can catch up on our backlog.

Okay, and then can you, obviously you said that the business remains very robust. Just curious if you can if there's any detail to add I guess you talked a lot about electronic measurement but maybe one of the life science, chemical analysis side in terms of what you saw specifically maybe in July towards the end of the last quarter and some of the life science companies were saying they started seeing some things slow in Europe in particular and maybe a little bit in the US, so just I guess curious what you guys thought as you exited your quarter.

As you can see by our numbers our organic growth rate in both chemical analysis and life science was very robust but I'll have Mike and Nick give their color commentary in terms of any trends but again, we had a strong quarter.

I'll go first, this is Nick. Just a quick comment. So we had double digit growth across all regions in life science with Europe doing about 13%, so we haven't seen any softness in Europe and we built backlog for a range of reasons including the parts issues, no pun intentional, so we're in a pretty strong position. We're not seeing slowdowns and if anything, we keep commenting about pharma, its moved into positive growth territory, including Europe so while it's soft and coming back slow, we're seeing real growth come back across-the-board, so whatever weakness is out there, it may be in sectors that we don't touch as strongly like the academic in Europe where we're not as big a player.

Jonathan, a similar message on the chemical analysis side. Continued strong recovery in both America and Europe and continuation of the Asia growth story for us.

Okay, congratulations, thanks.

Your next question comes from the line of Tony Butler of Barclays Capital. Please proceed.

Thanks very much. A couple of questions. One, again to Varian. Something new to Agilent so obviously is that where you're having parts shortages and moreover are you having increasing demand there now that you're able to consolidate the salesforce and actually push that?

The part shortages across-the-board number one part shortages is electronic measurement, with the highest growth. Secondly I'd say Varian, third would be in the life science area but I'll have both Mike and Nick comment about the product portfolios. As I said in my comment, we are committed to we're not sure when this will happen but we will drive to become number one in spectroscopy, as well as NMR, and we're taking actions to do that, but Mike why don't you make a few comments, and then Nick about what you're seeing with the product portfolio that has come into the Company.

Let me talk about the three product categories. Bill mentioned the drive in spectroscopy, our drive to be number one, we're seeing already leverage from the combined salesforce generating increased demand and we plan stepped up R & D investments and continue to enhance that portfolio so good news there. We have not talked about it in this call today, but the consumables also a very big bright spot for us. We now have three additional divisions that are consolidated into our consumables business and already the new Agilent salesforce is selling the sample products from the Varian portfolio so getting good solid growth there, and then the vacuum business, which we've not talked a lot about today as well up 34% over last year and a nice recovery mode as well.

Research products is a pretty broad portfolio and NMR is the big business in there. It's still early. These are long cycle developments and long cycle orders so our committment to R & D in that sector is really resonating with customers. We are seeing some real funnel growth and some actual order growth but at this point the order cycle is so long that I can't claim any victories there.

Thank you, and last question is around LC. I know it was up 25% I think, comments made around not only 1290 but the mid range LC products. Is this the result of commitments for new orders or is it replacement orders? Thank you.

It's really the whole spectrum, Tony. We're seeing everything across-the-board but it's just a really strong product in the 1290. We followed up with new members of that family at the mid range and low end so now we've got the most modern portfolio across the entire range and as you can see we're doing very well but we're getting a lot of growth out of the applied markets as well, and those markets are places where there's new market creation so we're really proud of that 25% growth.

Thanks a lot.

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

Good afternoon. Bill, could you just talk for a second within the EMG group or business, Europe was up 18%, and could you just kind of explain maybe that number a little bit, and are we seeing maybe a fundamental up shift in R & D spend, or are we really seeing a bounce from last year, because 18% out of Europe these days is a pretty impressive number.

Again, this quarter I'm going to spend a lot of time bragging about the great product portfolio that we have and can't stress enough the transformation the Company has gone through moving forward, but I'll have Ron comment about Europe specifically. Again, given how strong our growth was. Go ahead, Ron.

Sure. Although Americas and Europe both had 18% revenue growth, Europe actually out grew the Americas with 24% order growth, so we're seeing very solid results in Europe and as Bill had mentioned earlier, we haven't seen any signs of a downturn at all, matter of fact, our orders are very robust across-the-board, so the business that is there, there is some manufacturing in Europe but there's obviously a lot of wireless R & D that we play in and we play across the overall wireless food chain as well as in the general electronics and communication space, so the short answer is we haven't seen a slowdown, the growth in Europe actually even outpaced the Americas.

Is there any leadership there in Europe on the LTE side? Have they maybe jumped to a bit of leadership in terms of not only development but deployment or is that not a big factor in that growth rate?

That's not a big factor in the growth rate. Now you have more R & D for wireless handsets and reference design houses in Europe but there's even more of a shift to that over to Asia so if you're looking for a shift in the balance of the players by regions, China is actually starting to grow more and more and they're implementing their version of LTE, called TD LTE which will probably be adopted in India as well, but it's pretty much across-the-board. Our oscilloscope products are also very strong. Our network analyzer products, as Bill mentioned, and we're seeing good strong order growth from all of our product lines at this time.

Okay, and then just one follow-up. Maybe for Didier. When you talked about some preliminary thoughts about fiscal 2011 in that forecast, obviously scenario, the difference between scenario one and two was just that core growth or organic growth assumption, and I'm curious, given let's say the three parts of the business between CA, LS, and EMG, is the difference in that core growth rate, is it primarily the assumption that you're using in EMG? In other words, is LC or CA and LS, are they pretty much static growth in both those scenarios?

They are more comparable in EM in both scenarios we're assuming lower growth than within the bond markets.

Yes, in the first scenario we're assuming approximately 7% growth for EMG and which corresponds to the SIA index and where it's expected to be for next year at 6.3% with minor share gains and again that's a relatively conservative number compared to this year. In the second scenario, we're closer to flat and the primary sector or sub segment of that is the semiconductor business, where we have modest growth in the first scenario and in the second scenario, we could withstand approximately a 45% decline in the semiconductor segment, and still deliver the second scenario.

And is the annualized run rate there, are we talking about maybe $160 million in revenue, just off of a third quarter performance? Just to size it?

Ask the question again, please?

Looking at the semiconductor revenue in the third quarter of this year just completed, if you were to annualize that number, what is the order of magnitude in the revenue right now?

We're not reporting that number. There's different parts of our business that actually play into the semiconductor business, direct products, such as our perimetric test products and then other products.

So much of our investment in semi would go into the chip design and again where we have a strong position in our scopes and we have the whole PCI Express moving forward but I think it's fair, Ron that in terms of stuff that is tied, we still have a small business tied directly to IC Cap and that's probably in the $100 million range you're talking about so it's not very large, so if you assume an organic growth rate say nominally seven, you get to nine with a stronger EMG, a little bit below that with a weaker EMG, that's how I would characterize it and it's as simple as that and obviously we'll nail this down next month and report it in our guidance moving forward but that's how I look at it seven plus or minus a couple barring major downturn.

Okay, very good. Thank you.

Your next question comes from the line of Mark Douglass with Longbow Research. Please proceed.

Hi, good afternoon.

Hello.

Congratulations to Didier.

Thank you.

If you go back to EMG, any adjustments right now into your expectations for mid cycle margins versus your latest mid cycle target you gave earlier this year, you're not at mid cycle yet but you're already at 18%. How should we think about that going forward.

I think Ron is going to do really well so I'll let him answer the question.

Yes, as we mentioned earlier, operating margin at this point is at 18% and we talked about it at a $600 million per quarter run rate or $2.4 billion bottom or trough that we would produce 12% operating margin and 21% at the peak. We're clearly well above the mid point right now and our margins continue to be healthy and our guidance will reflect what we think we can deliver.

We had spoken about this, the transformation of EMG has just been dramatic and won't take much for Ron to get over 20% operating profit depending on the recovery. You couple that with two other parts of the business that historically have been growing substantially above the organic growth rate of the market, it's just a great combination and another plug in for EMG, this is probably the first quarter that we believe the organic growth rate was higher than the market so Ron's transformation is done, we've got a great product portfolio moving forward, and you couple that with the Varian acquisition and continued strong position of our chemical and life science business, I think we're very well positioned moving into 2011.

Okay, thanks. And then Ron, on your lower priced O-scopes, the sell-through for that, is that matching your expectation, exceeding your expectations? Do you pretty much believe you're getting share gains there?

We're pretty sure that we are getting share gains and again with over 50% order growth and when we look at the sell-through working with distributors, we feel very confident that we are taking share in that space, and again the 45% revenue growth was basically supply limited where we could have delivered even more than that, but we feel very confident that we're taking share and we're penetrating areas where Techtronics used to play as our lower end product line and middle range product line is more competitive and at the high end we have the world's highest performance realtime bandwidth that really is a very large deal for our leading edge customers so we're very pleased with our overall oscilloscope product line and again, we've grown faster in the oscilloscope product line in the last eight years than any other player in the industry and we're excited to see the share gain we'll continue to get.

And my final question, is there a possibility of a modular hardware release any time in the near term, and if so when are you thinking about that?

We don't make any pre-announcements of products until they are ready to go and on the shelf but thank you for the question.

Your next question comes from the line of Paul Knight with CLSA. Please proceed.

Hi, Bill. What was the growth in Japan in the quarter just posted?

I'm looking. The Japanese growth was 16% year-over-year.

So no real slowdown from the stimulus there?

Sequentially, it was down so you always give a big mix but at least year-over-year and in fairness, we've got the compares that will get worse as it's more difficult to move forward but again the Japanese business was okay.

And we look at the EMG business today, what portion is it roughly going into these R & D markets? Is it a quarter, a third, what's that level?

It's between a third and half of our business is going into the R&D markets today and we expect that number to migrate up and just to follow-up on the last question, revenue tells you a little bit about what's going on in the markets if you're looking for if there's a slowdown or not, orders is even more timely, our orders for EMG in Japan were up 69% this last quarter.

And for the Company overall, orders were up 45% on an organic basis.

Why do you think that is occurring?

We're seeing some investment in LTE in Japan. They plan to launch in 2010. There's a lot of spending right now on base stations and Japan is providing a lot of components to feed into the China market, so the success in Japan is not necessarily just about the Japanese end market, but it's really about China and as we talked about, our China growth is very strong at over 60% for EMG.

And Bill, lastly, what type of GDP in Europe would you assume under scenario two?

Quite honestly I wish that Agilent could have an impact on the world's gross domestic product overall moving forward, and that's why it's so important for us to focus on our investment where the money is, where people need measurement tools, and I think some of the numbers we are sharing with you today is indicative of our ability to have the right products for the market needs. Again this recovery is very fragmented. You really need to go into each one of these market segments to really understand what's going on and fortunately we don't make any measurement solutions for the construction industry as an example for that, but our overall assumption in Europe that the gross domestic product will grow in the 1%-plus range.

Okay, great. Thank you.

Your next question comes from the line of Ajit Pai with Stifel Nicolaus. Please proceed.

Yes, good afternoon.

Hello.

Just wanted to visit your operating margin for the overall Company. I think you've had a record sort of third quarter operating margin this time and materially lower revenues, I think you've attributed some of that to a mix shift and be on the EMG side, but your margins right now are still below your targets in EMG for peak targets and also for when you look at a chemical analysis and life science margins on an operating side, there are significantly lower than what you have delivered in the recent past in 2008, so from a broad perspective where do you expect your operating margins to go over the next couple of years, how much higher and on what level of revenue?

Well the operating models for chemical analysis and life sciences as you know are being impacted with the Varian acquisition. The gross margin difference between Varian and ourselves are 10 points and we are fully committed to make up that difference and that's why we're so confident that we will be to drive the $75 million of net savings going forward. In terms of the margin for electronic measurement, I'm confused on your question, because both the gross margin and the operating profit in electronic measurement are close to record highs.

Right, so how much higher can they go on the electronic measurement side and also Varian, yes. That's the reason why the operating margins have been impacted but how much time do you think it's going to take and can that entire Varian portfolio get to the same operating margins that chemical analysis, for example, had in the July quarter of 3008 when you're at about 28%?

We are absolutely committed to drive efficiency in the Varian portfolio. The teams are in place. We are working today. We've made decisions in terms of where we can consolidate operations. We have teams from the Agilent side working on what we can do to drive sharing of procurement purchasing across the Company and so that's why we're so confident over the next two to three years we'll be able to get those margins out. In terms of electronic measurement side, we are absolutely committed, Ron is absolutely committed to drive to the high end of our 30 to 40% incremental so if you go back to, if Ron can continue and EMG continue to drive the top line growth at a high 30s, 40% increment, you're going to drive the operating margin quite a bit higher.

Okay, and then just moving to the business portfolio, the second half of the 90s one of the big drivers of Agilent's business was optical and since then you folks have cut back quite a bit in terms of cost over there, pruned the portfolio and also divested some businesses in the semiconductor product group side et cetera, that had exposure there. Today, how much exposure do you have to wireline communication as a percentage of the EMG group?

Well our wireline percentage of the business is relatively small. Investment is still going into optical transmission. As you know with IP networks, the difference between wireless and wireline is becoming blurred. I think we have a very strong position moving forward but to believe that there's going to be a reoccurrence of an optical boom, there's just no evidence of that moving forward, good news is it's not going to get any worse. Our growth, actually Ron can talk about where we are in our optics side, was doing okay but we're not forecasting any resurgence of an optical boom.

Okay.

Optical was approximately 38% this last quarter but again, as Bill says it's a relatively small portion of the business, so we're somewhat immune to cycles in the optical side.

Okay, and then the last question would be just I think someone has asked something similar earlier in the call, but looking at the future acquisitions, Bill you mentioned that you don't see yourself doing anything significant for the next six months, but in terms of priorities, which sort of broad areas, where if you think that you would be more active, and are looking at either consolidating transactions or enhancing the portfolio, and also how were you looking at acquisitions now? What are the metrics you're looking for?

So we've been very public about this. Our number one priority is to continue to expand our life science portfolio. We will continue to invest in the applied chemical markets, particularly on the consumable side and we believe those are the largest markets and largest opportunity and particularly given our strong market position already in electronic measurement, our criteria for acquisition remains the same. We are absolutely committed to drive value for the shareholders. The acquisitions have to be accretive in year one and of course have to be able to drive something that is above our return on capital and get back to our long term operating model of 20% over time so we have not changed our criteria and we will continue to look for opportunities to expand our analytical product offerings and consumables.

Is there something that is relatively small that can be in the cards or is it focused on mid to large size acquisitions? You mentioned there's nothing large for the next six months but is there a pipeline for smaller bolt-ons?

As you know we've made 21 smaller acquisitions over the last five years so we'll continue to make those types of acquisitions. They tend to be technology-based, quickly integrated into our businesses moving forward, so yes, we'll continue to do those, but they aren't going to be material short-term to the Company.

Got it. Thank you.

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

Hi, this is Anthony Luscri on for Mark. Quick question on your communications revenues in the current quarter. I see you've been running about a 17 to 18% run rate over the last couple quarters and when you add up the last couple of quarters on the slide that you present, it's at 20% so that's a pretty significant jump. Is that all LTE related and then am I reading that correctly and I have a follow-up.

A lot of the growth is just the reemergence of investment, and as Ron said in manufacturing as you know, SmartPhones, the actual number of units have gone up and the expansion in China with their 3G rollout. Plus the LTE R&D investment.

Okay, and then for the outlook for fiscal year 2011 and EMG, can you speak to some of the secular drivers within the segments you play outside of LTE beyond just the Agilent strings such as the strong product portfolio and market share gains that you're seeing? Thanks.

Yes, I think that overall, we believe aerospace and defense business will continue to grow next year. Our business outside the US continues to be robust. The efforts that we have made in operational surveillance has continued to do very well and as we have made recent public statements we've done a very good job of winning large tender offers in the US military. So, and if lieu at the DOD budget there's no evidence of any severe cutback in 2011. Yes, the refocus of priorities but the fundamental investment we believe will not be a material change.

Communications we talked about. It's all about the growth in the wireless and the continued investment in LTE. In the industrial and computer is all driven by the macroeconomic environment. Yes we have a great product portfolio in there, but the major drive is continued investment and capital investment, so the only areas we noted is in the semiconductor business, will there be an asymptote as capacity catches up with demand moving forward but as I had said to a previous question, roughly it will be about $100 million that's kind of caught in what would be your typical semiconductor cap business, so again, not super material to the outcome of the Company.

Thank you.

Today's final question is a follow-up from the line of William Stein with Credit Suisse. Please proceed.

Thanks. Something we haven't spoken about on this call I think or at least I haven't heard it is stimulus spending and how that's impacted your business so far and whether there's much left to benefit the Company. Bill, can you give us some idea as to how that's helped or not helped the Company?

Yes, I will give a broad editorial comment which I've said quite publicly and then I'll have Nick have a comment because that's where a lot of the big NIH funding is going. Governments around the world have basically invested over $2 trillion in stimulus money in various ways. It is my firm belief here, regardless of one's political persuasion, that $2 trillion will in fact have an impact. You see the stimulus money that went into China. They still have the capability to do it again. I'll have Nick comment on the stimulus money in the US. Every country does it a little bit differently and so it really is hard to track, but that investment of not only stopping the financial crisis in 2009 but in fact putting more money into academic research and across-the-board has had I think a positive impact, very hard to quantify that outside of big areas like NIH.

This is Nick. We still see this money out there flowing. It's just flowing slowly and it's coming out because of the way they put it in the system and this is not just a US comment but certainly in the US, the money is starting to flow. It's really not going to have a huge impact for Agilent, and we think actually it's going to have a smoothing impact on a couple year basis around the globe. You've seen us make comments about moneys coming out of Malaysia, we're seeing money in Southeast Asia and these moneys will continue to flow as governments invest in healthcare and life science research and so we hope to catch our share but we don't think you're going to see any big bumps nor big stops.

I tend to look at adding up all of the stimulus money you can calculate is it 1% of growth in the world or something like that but it's more of the money gets spread quickly, really hard to track down.

Thanks very much.

That concludes today's question and answer session. I would now like to turn the call back to Alicia Rodriguez for closing comments.

Thank you, Crystal and I'd like to thank everybody on behalf of the Agilent Management team for joining today. If you have any questions please feel free to call Investor Relations with follow-up items and I'd like to say thank you and good day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.