安捷倫 (A) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 Agilent Technologies Incorporated earnings conference call. My name is Kesha and I will be your operator for today.

(Operator Instructions)

I would now like to turn the conference over to your host for today, Ms. Alicia Rodriguez, Vice President of Investor Relations. Please proceed.

Thank you, Kesha, and welcome, everyone to Agilent's fourth 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 Didier'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 the business segment financial tables are in the schedules that accompany the press release. We are also providing further information to supplement today's discussion. After you log onto our webcast module from our website, please click on the link for supporting material. There you will find additional information such as our revenue breakouts and historical financial information for Agilent's continuing operations.

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 metric. 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 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 continued to build on the strong momentum that we have seen throughout fiscal 2010. There are three major themes that have emerged. One, we have successfully completed the transformation of Agilent. Two, the Varian integration is going exceedingly well. Three, we are benefiting from strong organic growth as a result of the regional sales support expansion and technology investments we have made. Fourth quarter orders of $1.7 billion were up 32% year-over-year, while revenues of $1.6 billion were up 36% from a year ago.

Note that these numbers include the results of the Varian acquisition. Without the Varian acquisition and recent divestitures, orders and revenues were up 23% and 26%, respectively. In addition to the top-line growth, our Q4 non-GAAP earnings were more than double to $228 million or $0.65 per share from a year ago. Agilent's fourth quarter revenue growth was strong across all regions. Excluding acquisitions and divestitures, the Americas were up 23% year-over-year, Europe was up 13%, and Asia-Pacific was up 38%.

On November 1 we successfully reached a major milestone in the integration of the Varian acquisition. This includes combining all Agilent and Varian legal entities and moving Varian employees to Agilent's pay and benefits. Agilent and Varian now appears as one single Company to our customers. We now have one website, unified call centers, a combined field organization, and a single service and support process for our customers. Quotations, orders and invoices are all common for Agilent and Varian products.

Moving forward, our priorities to continue to drive revenue and cost synergies, as well as to drive technology sharing between the divisions and business groups. We now believe that we will achieve $100 million in net savings. This is inclusive of $10 million of additional R&D we are investing in Varian technologies, as well as our increased investment in service and support. From a market perspective our fourth quarter results saw continued strength in our key markets and geographies. In our Chemical Analysis business we saw sustained growth across all market segments.

Q4 revenues of $389 million were up 73% over last year, up 17% excluding Varian. Operating margin including Varian was 22%. The energy and petrochemical markets continue to recover, while food and environmental markets remain strong around the world. From a product perspective, our new product introductions of GC/MS, ICP/MS, and GC Triple Quad continue to drive strong interest and growth in food and environmental applications. And the 5975 transformable MSD, which was introduced at PITCOM, is getting significant interest from government sector.

In our Life Science business revenues of $431 million were up 35% over last year. Not including Varian and the HICOR divestiture, life science revenues hit an all time high, growing 17% compared to Q4 2009. Operating margin including Varian was 14%. Academic and government revenues grew 31% over last year on an organic basis. The academic market remains solid, particularly in light of US stimulus and growth in China. We saw 14% year-over-year organic growth in pharma and biotech.

The market continues to face a paradigm shift as companies continue to restructure, outsource and move to low cost locations. We are well positioned to take advantage of the pharma shift to developing countries. From a product perspective, platform growth was strong across the board with life science platforms all growing by double digits year-over-year. LC revenues, led by our 1290 and 1260 products, were up 21% year-over-year. LC/MS and genomics, including our SureSelect products, continue to perform very well.

In Electronic Measurement revenues of $764 million were up 23% from year ago. Excluding the Network Solutions divestitures, revenues grew 35%. Operating margin was 20%. Aerospace and defense was up 16%, while revenues from industrial, computer and semiconductor customers grew 43% from a year ago. Electronic industry growth continues to be strong and outpace general economic growth. Key drivers continue to be business investment and emerging economy expansion.

Excluding the Network Solutions divestitures, communications revenues were up 41% over last year. 3G technologies continue to dominate spending in both wireless, manufacturing, and wireless R&D. LTE investment is focused on R&D and continues to grow. Geographically, all regions saw a year-over-year increase led by Asia, which contributed half Electronic Measurements dollar growth. From a platform perspective we have our strongest product lineup in years. Our PNA-X network analyzers, PXA signal analyzers and PSG signal generators all continue to drive growth and outperform our competitors. Our scope business was up 39% year-over-year. We are continuing to gaining share with our high performance oscilloscope, led by the success of our [Infineon] X series. And we introduced 48 new module instrument products in Q4.

Moving forward, 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. First is our market reach and customer trust, where we continue to invest in customer service and support. We are paying special attention to supporting our continued growth in Asia.

Second is our technology leadership. While we are currently have the leading technology in every one of our core platforms, we will maintain R&D investment at 11% of revenue in fiscal year '11. We continue to believe that our above industry average R&D investment will maintain our technology leadership across all major products. In addition, it will fund such strategic initiatives as life science, operational surveillance and nano technology. We plan to release many exciting new products in 2011.

Third is our scale and scope. We currently have among the lowest instrument cost of sales in the industry. At the same time, we maintain our stellar reputation for quality and reliability. Our global manufacturing capability is second to none. As we move into 2011, we plan to drive substantial improvements in cost of sales across all Varian portfolio, as well as improve cost of sales across the balance of our analytical product portfolio. For example, we have recently opened our new LC/MS factory in Singapore. We plan to transfer RF console manufacturing for MNR to Penang. We will shut down our Walnut Creek facility and consolidate it with other Agilent facilities. We will move machine tooling out of our Australia facility and we will continue to leverage the scale of our procurement and logistics operations.

The fourth way we differentiate ourselves is our team. Our 18,500 employees remain focused externally on our customers and our market opportunities. We're in a strong position moving into the new fiscal year. For the first quarter of 2011, we expect revenues in the range of $1.53 billion to $1.55 billion, non-GAAP earnings are expected to be in the range of $0.55 to $0.57 per share. For the full fiscal year 2011 we expect revenue to range from $1.6 billion to $6.3 billion(Sic-see press release) and non-GAAP earnings of $2.30 to $2.50 per share. Thank you for being on the call. And now I'll turn it over to Didier.

Thank you, Bill, and good morning, everyone. I'll start by providing additional color on our fourth quarter results and then comment on our outlook for Q1 and the new fiscal year. And all my comments will refer to non-GAAP figures. So starting with Q4 results. As Bill mentioned, Agilent delivered a very solid fourth quarter performance. Orders of $1.7 billion were up 32% from one year ago, both in dollars and local currency, with Asia-Pacific up 40%, the Americas up 27%, and Europe up 31%. Orders grew 23% on an organic basis. Revenues of $1.6 billion were up 36% in dollars and local currency from one year ago or 26% on an organic basis. All three business segments generated strong double-digit revenue growth, both in total and organically. Geographic revenues on an organic basis increased 38% in Asia-Pacific and grew 23% in the Americas and 13% in Europe. Organic revenue growth in China was 37%, while India revenue grew 31%. Now, moving to the income statement.

Fourth quarter non-GAAP operating profit of $303 million improved $153 million from one year ago on a $417 million increase in revenues, a 37% operating margin incremental. Excluding Varian, the year-over-year operating margin incremental was 63%, with all three segments delivering very sound operating margin incrementals on an organic basis.

The story of this outstanding year-over-year performance remains the same as last quarter, as we saw strong top-line revenue growth coupled with a markedly lower cost structure that was created through our restructuring programs completed earlier in the year. Currency had minimal impact on any of the income statement line items. Now turning to the individual income statement line items. Fourth quarter gross margins of 55.3% were essentially flat from last year. Excluding Varian, gross margins of 57.1% improved by 1.5 points over last year. We did recognize a few nonrecurring costs in Q4 that reduced gross margins by about 0.5 points.

Fourth quarter operating expenses increased $73 million year-over-year, primarily due to the Varian acquisition. Wage restoration and higher variable and incentive pay were offset by restructuring savings. Operating profit of $303 million more than doubled from the same period last year. Agilent's fourth quarter operating margin was 19%, an increase of 6 points from one year ago and our highest operating margin performance ever. Net other income and expense declined $12 million from last year due to higher interest expenses. However, we plan to retire the $1.5 billion world trade debt on December 1, two months earlier than planned, which will reduce our interest expense by over $2 million per month starting in December.

Moving to taxes. Note that our non-GAAP tax rate will remain at 19% in fiscal year 2011. We expect our non-GAAP tax rate to further decline to 18% in fiscal year '12 in conjunction with the completion of the Varian integration. Non-GAAP net income of $228 million or $0.65 per share compares to $111 million and $0.32 per share one year ago. Both quarterly earnings per share and full year EPS of $2 are record highs for Agilent.

Now, turning to the cash flow and the balance sheet. We continued to demonstrate discipline in asset management. Inventory days on hand of 92 days were five days better than one year ago. Receivables day sales outstanding increased three days from one year ago to 49 days, due to Varian higher day sales outstanding. Total cash from operations was $367 million, an increase of $154 million from one year ago.

During the quarter, we received $37 million from employee stock programs and repurchased $51 million worth of shares. Year-to-date, we have received $301 million and repurchased $410 million. We will continue the present buyback program intended to keep the basic outstanding share count at 346 million shares. This entire dilutive share buyback program will utilize about $120 million in cash in fiscal year '11. Based on the present stock price, you should assume 356 million diluted shares throughout fiscal year '11. With regards to net cash, we finished the quarter with net cash of $598 million.

Now, turning to the fiscal year 2011 outlook. You will recall that last quarter we provided two scenarios that bracketed the range of analysts' estimates with a revenue range of $5.9 billion on the low end and $6.2 billion on the high end, and EPS of $2.15 to $2.50, which was based on 352 million diluted shares. We are now increasing our fiscal year '11 revenue guidance range to $6.1 billion to $6.3 billion and EPS of $2.30 to $2.50, based on 356 million diluted shares.

With this new guidance, we are raising the low end of the revenue range by $200 million and $0.15 EPS and the high end of the revenue range by $100 million with no change in EPS. We are holding to the high end of the EPS range, as more than half of the projected revenue increase is due to currency changes that provide minimal incremental operating profit. In addition, we're selectively investing about $20 million on revenue generating projects and activities.

Finally, the 4 million shares increase -- the 4 million share increase in diluted shares reduces EPS by $0.03. You will note that the midpoint of our revenue guidance, $6.2 billion, translates into 13% year-over-year growth or 8% growth on an organic basis. The midpoint of our EPS guidance, $2.40, translates into 20% growth over our fiscal year '10 EPS of $2. Here are a few other items to keep in mind as you update your models for fiscal year '11.

Annual salary increases will be effective December 1, 2010. Stock-based compensation will be about $73 million compared to $66 million in fiscal year '10 and as we front load the recognition of stock-based compensation, the Q1 expense will be about $26 million. Third, we expect operating cash flow of approximately $950 million and capital expenditures of about $150 million, which yields free cash flow of approximately $800 million. Fourth, we distribute our variable pay and incentive pay in Q1 and Q3, hence, Q2 and Q4 are seasonally higher cash flow quarters. And fifth, depreciation, amortization are projected to be $150 million for the fiscal year.

Finally, moving to the guidance for our first quarter. We expect Q1 revenues of $1.530 billion to $1.550 billion and EPS of $0.55 to $0.57. And the midpoint year-over-year revenue growth will be 27% or 16% on an organic basis. The midpoint of our EPS guidance corresponds to a year-over-year EPS growth of 47%.

As you consider the projected decline in EPS from Q4 to Q1, you will want to keep in mind the impact of the December salary increase, front loading of stock-based compensation and the increase in payroll taxes due to the disbursement of our second half fiscal year '10 variable and incentive pay. With that I will turn it over to Alicia for the Q&A.

Thank you, Didier. Kesha, will you please give the instructions for Q&A?

(Operator Instructions) Your first question comes from the line of Jon Wood representing Jefferies, please proceed.

Hi, good morning.

Good morning.

Hi.

So, Didier, can you help us tease out just ballpark by division growth, organic growth assumptions or EM, BAM, Life Sciences and Chemical Analysis for fiscal year '11?

Yes, I'm looking at the high and the low end. So overall, we're talking about for the full year , EM is about -- hold on. Okay. Yes, it's about 10% on -- I'll give you -- let me give you on the high end of the range. EM would be about 10%. LSG would be about 14%. CG will be about 7%. On the high end of the range. So you have to shave off like 1 percentage point to get to the mid level of

Got it. And then if Nick Roelofs is there, just how are you thinking about pharma in 2011. Obviously there's been a rebound, but a lot of pain still on the tape for the therapeutics companies. So would love to hear your perspectives on pharma in '11.

Yes, Jon, thanks for the question. Given our portfolio, we're still seeing the same dynamic, which is investment is lighting up in places like India, Korea. In fact, we were a little bit positively surprised this quarter at pharma's strength in the US. Europe is going to remain soft. If you dig underneath that, what you see is this continued transformation of NCE to NBE, plus the surprises we're seeing in the US are really a recycle of the replacement market. So that's starting. And I think we're going to see replacement in G8 countries from big pharma on top of our natural trend that we've been talking about for several quarters. So we think it's going to be pretty good. You saw 14% number this quarter. This was a hot quarter. We think it's going to be a pretty good year for us in our space in pharma.

Okay, great. And then last one for Bill. Bill, if we look at the capital deployment scenarios in FY '11, is it reasonable to assume that if there's no M&A kind of in the second half of '11, that that buyback number could be higher than kind of the base case assumption of $120 million?

Again, as Didier said, I think you should assume the guidance that we have given. Our top priority right now is to pay back the world trade debt that will drive EPS growth. The big issue we have is continued repatriation of cash back into the US and so obviously if the environment changes or just the normal course of business that we can get more cash in the US, one might consider that. But right now I would assume for 2011 that we'll pay off the debt and maintain the share count as Didier outlined.

Okay. Thanks a lot.

Your next question comes from the line of Tony Butler, representing Barclays Capital, please proceed.

Thanks very much. Two questions. One is what do you see with respect to commodity price elevation and how is that affecting your cost of goods? Are you able to actually get some pricing through to the end customer as it relates to that elevated cost of goods? Second question is much like the previous. Could you frame the relative end markets from the low end scenario to the high end scenario? What would a low end scenario end market look like or among the businesses and what would the higher end scenario from those end market outlooks look like? Thanks very much.

Sure. Thank you for your questions. In terms of costs, I'm going to have Ron make a comment on this because he's by far the bigger user of components. Overall, though, the component shortage is clearly subsiding and that the availability of components has been better and of course if you look at our cost of sales as Didier, ex-Varian, we're obviously able to compensate for that. But I'll have Ron give some commentary just on availability and pricing.

If we look at our gross margin for the last year, we had actually the highest gross margin that we've seen in the last decade in fiscal year '10 at 58%. So overall, our gross margin is doing very well. We do not see material price inflation. Our cost of goods cost reduction programs are offsetting that and we do not anticipate there to be a big issue.

And just to conclude. The work that we are going to do on improving the Varian cost of sales, I think, is just going to overwhelm any increase of component part costs. In terms of your second question, again, the low end is the guidance that we gave at $6.1 billion, we have enormous momentum going into 2011. Our backlog has grown. The order rate of $1.7 billion in Q4, again, have continued to have very solid greater than 1 book-to-bill and so the big wild card is the second half of 2011. We have assumed in this plan that growth in the US and Europe and Japan would be at best 2%. Could be lower than that, aggregately. We still believe that there is opportunity in emerging markets, obviously, China and India. But we also see opportunity in Latin America, driven by Brazil, and continued growth through some of the other countries in southeast Asia. So we think we have a very balanced portfolio, coupled with that is that we are going to maintain our position as the technology leader and I still believe that almost any scenario that customers will be able to pay for differential measurement solutions.

Thanks, Bill.

Your next question comes from the line of William Stein representing Credit Suisse, please proceed.

Thanks. Bill, I'm wondering if we can dig into Varian a little bit. I apologize if this was addressed on the call. I joined a bit late. Can you help us understand how far along the Company is in terms of integrating the business and capturing some of the revenue decline that we saw at that business before the acquisition was completed. And then also from the perspective on the cost savings, how far along we are in that process today.

So the good news in the quarter for Varian is the revenue was, I believe, roughly $192 million. So after a slow start in Q3, we obviously made a big recovery in Q4. And so we're quite pleased with the momentum that we have going into 2011. So that's the good news. The opportunity continues to be the cost of sales. I did outline in the call that we have taken various steps. I announced the closure of the Walnut Creek facility and consolidating into other Agilent locations. We've announced the transfer of the RF consoles to Penang and again to leverage our EMG capability there.

We continue to look at opportunities to leverage our procurement and operations and this last weekend we went live with essentially a quote to cash process so that we have an invoice process that's one with Agilent and that is going exceedingly well. All 3,000 employees essentially have been transferred over to the Agilent pay and benefits. And so again, from my perspective, the integration is going spectacularly well. The big long-term issue, and again I'll have Mike make a comment and then Nick, is to really take the additional R&D spending that we are making to be able to expand and to upgrade the Varian platform in conjunction with our effort to reduce the cost of sales. This of course takes time.

It's not going to be done overnight, but we have very, very solid plans to drive the Varian cost of sales to Agilent standards and in fact in my opening comments said that we are raising the $75 million of cost synergies to $100 million. So we're just getting a lot better handle on that and I'm very pleased with the revenue growth that we've got Q3 to Q4 sequentially in Varian. So Mike, do you want to make a comment about Varian.

Yes, sure, Bill. I'd like to really focus my comments on two areas. First of all, building on Bill's comments around the integration of the team. On the field side we now have a fully integrated field organization and what we may not have been communicating previously is we've actually been making a series of investments to further build out the resources in targeted areas which where we see growth. The majority of those hires have been completed, training has been done, and really well positioned as we go into FY '11 from a field capability and resource side. As Bill mentioned earlier, the portfolio, the key aspect of the go forward business and what I mean by that is we have doubled down on our R&D and have a number of very aggressive programs to refresh and enhance the portfolio. You should expect to see us coming out with new offerings in the coming quarters.

That's really helpful. If you don't mind one quick follow-up. A lot of questions came in yesterday to me following Cisco's results and their commentary on weak spending by state and local governments. Can you give us just a brief comment on whether you're seeing any weakness related to that in either of the two businesses or either the three segments, I should say, either at the federal, state or local level?

It's a good comment. Well, if you don't mind, I'm going to have Nick just make a comment about the MNR business. And I think it's really important, because that was the product line that, quite frankly, we need to make the investment but secondly, it really allows us to leverage our RF capability. I think it's important to have Nick make a comment about that and then I'll answer your question about the government spending.

Will, this is back, of course, to your first question. Really in the Varian research products business, first, we saw the strongest orders and the strongest revenue in the history of that business and I think the orders is a complement to the fact that the customer base is seeing us invest in sales and service and seeing that team starting to get trained now that we're two quarters in and they have confidence that we will really be there for them to service. They obviously can't yet see the investments we're doing in R&D, but that's the other side of the same equation, which is we have real confidence that we can put some momentum into the cost of goods of the product, both with breakthrough technology from the RF capabilities of EMG, but also, as Bill mentioned, we are moving our console to be close to, actually on top of the EMG manufacturing site in Penang and that will give us cost of goods, as well as proximity to accelerate getting those R&D improvements into the product mix.

Great, thank you.

And then in terms of government and, again, I'll have Mike make a comment about forensics environment. They are the classic ones that are government, but from the DOD perspective, which is by far the biggest government, our growth rate was 17% year-over-year, 8% sequentially. So our aerospace and defense business continues to do quite well. That's obviously not talked about this quite publicly, is one of the bigger concerns that we have had in terms of will there be major cutback in the US given that's half the market and to date we continue to do very well with leading products into that. The DOD budget for next year, in fact, is I believe up 4% and we continue to do well in other countries outside the US. So Mike, you may want to comment on the environmental and forensics, which is another heavily government purchased commodities.

Yes, sure, Bill. Will, this is not (inaudible) story here from a chemical analysis perspective, we've actually seen continued strength in the government sector, both in US, China and other emerging countries. I think you saw in our announcement, for example, some of the success we've had with a recently introduced transportable GC/MS product. Just one more indication of the willingness to invest in areas that are of quite an interest to in the public sector, whether it be food safety and whether it be the environmental hazards that may exist in their local communities. So we've actually seen continued strength from a government level of funding throughout this quarter and expect to see that continue into FY '11. By the way, the state forensic level spending in the US has been depressed and we're not really counting on a major recovery there. But overall, the government driven spending in our business has been solid and we continue to expect it to be robust.

Very helpful, thanks.

Your next question comes from the line of Jon Groberg representing Macquarie, please proceed.

Hi, thanks for taking the questions. I'll be brief. Just first of all, did you explain why the share count is going up? I thought you said you were going to try to keep it flat. You're saying it's up four million. Is that a reflection of the share price?

Exactly. We are keeping the basic share count outstanding at 346 million shares. This one we really control. The diluted share count we don't control because it's very much impacted by the share price and with a significant increase in the share price, now we are seeing at $35, $36, we computed that our diluted share count would be about what I said, 356 million shares, even as the basic outstanding share count, which we control, will remain at 346 million, which is the intent of the program.

Is there some rule of thumb there, thanks for the clarification, some rule of thumb like if your stock price were at $40 instead of $35, like what does that do to the diluted share count.

Well, our share count, diluted share count this year has been between 350 million and now it's 356 million, so you can map that to the change in the share price. But it could change over time depending on the, obviously, when those stock options events and things like that. But, yes, that's about that. Our share price has been between what, $27 and $36 and diluted share count between 350 million and 356 million.

Okay, perfect. Thanks. And then if you can, I don't know, Bill, or if anyone wants to answer this question, but you're doing 20% operating margins in EM right now. Looks like you still see continued momentum in that business. Any update in terms of kind of the operating model for that business?

We are on a lot of momentum and I'll have Ron answer your question.

We obviously feel very, very comfortable with the model that we have outlaid and we've been outperforming it with the 58% incremental during this past year. The cost structure that we have, we are maintaining what we had planned and we are capturing upside. For instance, in the oscilloscope market, we had mentioned that we had 39% revenue growth, but if we look at the last quarter, our order growth was over 70%. We also had record high high-performance scopes, record high sampling scopes, all regions were over 50% growth and we had record high unit growth. So there's a lot of things that is helping us drive great incrementals in the business and over 40% incrementals as we go forward. But we feel very comfortable with the guidance that we've given that we'll l be able to meet or exceed that guidance.

Again, EMG, as you know, has targeted to have the high end of our increment, our 30% to 40% increment. And as Ron just said, absolutely committed to do that and all the incentives are in place to reward that result.

If I could just followup on EM on you're talking about the order growth. Are you seeing -- we heard previously, as we've been doing some discussion of that business, that there is a big replacement or the potential for a big replacement cycle. We talked about it on the LC side a lot, but maybe not as much on the EM side. Just given the advances that are being made in just technological requirements, whether it be in some of the optics or in the some of the busses and stuff, are you seeing -- is the growth just a rebound still or are you seeing like a replacement that you need new oscilloscopes that have higher speeds, et cetera, and there needs to be a replacement that goes on to be able to keep up with the demands, thanks.

The oscilloscope market and particular the realtime oscilloscope market really continues to grow because there continues to be new technology and new BUS speeds that demand higher and higher speeds as bandwidth, the bandwidth needs are insatiable. So that will always continue to go on and we've seen that continuously. On the overall wireless area, we're seeing the SmartPhone growth really explode, where we saw unit growth over 70%, over 70% unit growth for the industry and we've also seen the adoption rate of 3G phones continue to increase to about 24%. So there's a lot of talk about the next replacement generation, which is LTE or fourth generation. That is happening, but as Bill mentioned, that's mostly in R&D and we're seeing some infrastructure growth, although you won't see a lot of infrastructure growth until 2011 and more particularly 2012 and 2013. So the fundamentals are very good but it's not going to be an instantaneous stair step up. Excellent.

Your next question comes from the line of Ross Muken representing Deutsche Bank, please proceed.

Hi, this is [Wega] in for Ross and congrats on a nice quarter. I just wanted to dig in on the defense part and there was an press article out there in the Wall Street Journal yesterday as part of their deficit reduction commissions report talking about maybe $100 billion reduction in defense budgets. Just to be sure, on the defense part it's not a -- the way to think about it is aerospace, defense and surveillance equipment as well, incremental growth is coming in. So, in general, a news like, a headline news like $100 billion reduction does not necessarily translate to weakness on the defense side, right?

Absolutely. I'm going to have Ron make a comment about some of the sectors, particularly operational surveillance as you just referenced. Again, I've been very open about it over the last year. If you look at what the risk is, the risk is will there be a substantial cutback in defense spending given the budget issues in the US. To date, that has not happened. The budget for next year has not been cut. The recommendation, $100 [million], is from the task force the President has set up to figure out where are ways that the country can cut back on expenses. My own personal opinion, the short-term, given the employment issues, not obvious to me that those decisions are going to be made, but what we need to do is make sure that we have the right products for the next generation radar system, missile systems that we can make a contribution and the operational surveillance is just a real obvious place where that both parties fully support. So I'll have Ron give you an update on where we are on operational surveillance.

Yes. On operational surveillance we're seeing exceptional growth on the network side where there is surveillance on the network side and in particular, we've seen over 100% growth during the last year and seen that business move from investment mode to solid double-digit profitability. We continue to see that segment explode and even if there is some type of pullback on new programs overall in defense, we're seeing very healthy business at maintaining existing systems where Agilent's installed base and breadth of products is a real strong asset. So we feel very comfortable with the aerospace, defense market in general and see some real growth in operational surveillance.

Sure. And maybe a quick follow-up on the life science segment for Nick. You mentioned the academic segment was strong. Could you sort of just parse out what you're seeing in Europe and sort of what's been the stimulus impact of maybe some of your genomic, the SureSelect platform and sort of what can we expect going forward.

Yes. So the real strength in that academic segment, a lot of that is coming from investment in Asia, just as a comment. But you hit the nail on the head, two comments of the subtext. One, in Europe we actually were surprised to see quite a bit of academic sector growth in countries like France, Germany, Switzerland. And that was really nice, seeing them spend some of their money to put in infrastructure in the academic sector around life science. The big story really is the SureSelect, though. Genome partitioning in front of next generation DNA sequencing is really catching fire. You're starting to see others see that market opportunity as well. We believe we've got a tremendous technology leadership position there and we believe, therefore, we have a tremendous position in that market and that is growing in Europe, as well as around the world.

Maybe just a last follow-up on the SureSelect. We've heard some nice about (inaudible) gaining end products and just given where stimulus is, what's the expectation? I'm just trying to think second half '11 what's the expectations?

This is a market where you've probably seen this market grow 5X year-over-year as a market and we're riding a wave similar to that growth. So it's just a small nascent market that's now becoming a real piece. I think going forward you're going to see the dollar shifting from the reagent piece that is being spent in next gen sequencing on the instrument to that genome partitioning and obviously a lot of people are going to want to participate. There's a lot of good tools out there. We do think that we have a technically differentiable solution and by doing partitioning in front of the genome you effectively reduce the cost of real data coming out of a genome because you can do one tenth of the genome and effectively reduce the price and get all the data you need.

Thanks. That's it from me.

Your next question comes from the line of Richard Eastman representing Robert W. Baird, please proceed.

Good morning, Bill, and a question for Ron. On the EM side of the business when you look at, I think the Didier's comment that maybe for fiscal '11 EM would be up in the 10% kind of organic growth range. If you split that -- if you split EM into the two pieces, kind of communications and then all else or general purpose, a lot of new product flow on the general purpose side, the modular instruments, surveillance and, Bill, you mentioned nano tech. And then on communications you have kind of this LTE dynamic underplaying. So how do you look at those two pieces of the business relative to that 10% organic growth in fiscal '11 and how much of that might be new product driven versus end market recovery?

Richard, we have products that span both the GP market and the communications market with outside of divestiture grew 41% and 32%. And just to give you an idea, if you look at our core platforms, which includes our oscilloscopes, our network analyzers, spectrum analyzers and signal sources, they're used in both areas, with a little bit more bias of high-performance products in the communications segments. They grew 49% this last quarter. And we have spent a lot of time over the last three plus years refreshing those platforms. In particular, when we look at our network analyzers, we introduced the highest performance network analyzers this last quarter, the quarter before the highest performance realtime oscilloscopes and in the past couple of years spectrum analyzers and signal sources.

So we see that the refreshing of our portfolio is something that will drive both segments. Communications, clearly LTE and R&D, as Bill and I had mentioned earlier, will drive things. But there still is very substantial growth in 3G. 3G technologies, even particularly in China where we were one of the first ones to jump on the bandwagon of TDS CDMA, which is the China standard version for 3G. We're seeing some healthy growth from our investments. But we don't see a strong bias one way or the other due to the core platforms that span both segments, Richard.

Okay. And just, Bill, from the perspective of nano technology, some products coming out there. That's been a growth area for you, growth investment area for you. Is that sized to the point where it can maybe move the growth needle year-over-year for all of EM?

No.

Okay.

EM is just too big from the core.

Okay.

Again, our AFM or microwave AFM are continuing to do very well. We introduced a scanning electron microscope bench top version. But, again, just given the size of EM it's not going to move the needle, but some day it will.

Understand, okay. And then just lastly, how do you characterize price across the product lines, across the segments? I know typically it takes the form of less discounting, but is price a positive contributor year-over-year?

I think it's, clearly it's been not a negative. I mean, every account has a different story moving forward. Given the snapback and the component shortages, it's obviously had a short-term favorable impact on pricing just because of some of the delivery issues, particularly in EMG. And so as you go into a slower market, one assumes that there will be more pricing pressure, but that really is the strength of Agilent. We do have the best gross margins in the industry, we believe, and from an instrumentation standpoint and we have very aggressive programs going into 2011 to improve our cost of sales. So we will be competitive and right now, obviously, not planning for any degrading of our gross margins.

Great, thank you.

Your next question comes from the line of Anthony Luscri representing JPMorgan, please proceed.

Hi, good morning. I wanted to focus a little bit more on the gross margin profile in fiscal '11. I get the impression that you've had a great new product thrust over the last couple of quarters and I wanted to see if we compare the mix of the new products versus old, how that impacts gross margin and then how should we view the Varian cost of goods savings as well. So more or less, is the gross margin profile going to be back end loaded in fiscal '11?

To answer your question, the question's yes. If you look at all of our new products and again, welcome any of the group presidents to have a comment, typically our new products are performance leading and the gross margins go up and, as we have stated on numerous occasions, we have leadership in every one of our major platforms. Offsetting that of course, we have investment in these new initiatives that we try to get to profitability as quickly as we can. The number one task is the Varian product lines. And we have a full core press to be able to make that happen, to be able to address that. You're well aware of the gross margins at Varian, while it was a public Company. We have a lot of work to do, but the good news is that we know exactly what needs to get done. The teams are formed and it's all about executing moving forward.

In addition to that, and look at our life science business, Nick has already set up our LC/MS manufacturing site in Singapore. We will continue to aggressively balance our manufacturing around the world to ensure that we have very cost competitive products, not compromise reliability or quality, and of course we've minimized, as a result, any currency issues. But the task number one is the Varian product lines. Secondly is our continued focus on driving cost down. We just have a world class team. As you know, we do own our manufacturing. Yes, we outsource a lot of the PC board assembly and so forth, but we have 100% control and the result of that is that we have continued ongoing value added engineering to be able to drive cost down and have a program in place to ensure that we can get the best prices from our vendors across all of our product portfolios. Nick?

Yes, I would just like to add a little piece of granularity under two comments Bill made and they're both the same comment, which is the Varian piece that is in life science, and I'm sure Mike may want to comment as well, as Bill said it's job one. The rest of the portfolio, we've had two great years of product launches, but we are still putting a lot of money in R&D. And so on that gross margin side, there is working through the manufacturing structure, those comments are all absolutely spot-on. But we are also putting real R&D investment not only in our traditional Agilent portfolio, but in the new Varian products, and to the extent that we continue to deliver new differentiable products, we're going to have really nice performance for the customers and that should keep the gross margin high and we certainly, coming off two years in a row of beating our record of new product launches numerically, don't think we're done with that kind of cycle.

Thanks, Nick. And maybe just one further comment from the CAG side relative to this question. I would just re-emphasize some of the points that Bill made earlier. We know how to do this. We have a series of defined actual plans that are being executed right now and I think you'll start to see costs come out in FY '11. For example, such as combining logistic centers for example, so eliminating duplicate infrastructures. There's a number of actions that are being taken right now and we'll have costs coming out in the next couple quarters and then as we turn the products you will see improved gross margins there as well.

And on the EM side, our strategy has been to, one, move more of our business from manufacturing to R&D, which have higher margins, and two, focus on high-performance products and, three, add more application software, which has higher gross margins. So again, the move to R&D, higher performance products or performance leadership and application software are there to offset any type of pricing issues that we see in the manufacturing space.

In the last six years we have shared that one should assume that over a cycle, for example, that our operating profit, this is again operating profit, not gross margin, is 14%. You should all assume that we are committed to 18% and as you heard committed to drive as hard as we can to hopefully some day update that again.

Thanks. And a quick follow-up here. I noticed in your press release that you've indicated that the Varian integration is on track to meet the targeted revenue synergies. I don't know if I missed what that number is, but along those lines, are you seeing increased traction with new customers with the combined entity and how should we view the revenue flow-through over the coming years?

Right. So we had stated publicly that we thought the revenue would be at $800 million. As you know, in Q3 we were behind that and we had actually had lowered what the run rate was going to be effectively to -- based on the Q3. What was great about Q4 is that our revenue, as I said, was $193 million. Again, this will soon disappear, so we won't be reporting this after we get through one full year. But we're very, very close back to the original run rate and then as you can see from the comments that Nick just made regarding MNR and Mike, we're quite excited to see if we can in fact drive that. We have not made a statement on what that additional opportunity is above the $800 million, but as you can tell, Q4 was just a really solid quarter for those product lines and we're quite excited as we move into 2011.

Thank you.

(Operator Instructions) Your next question comes from the line of Mark Douglass representing Longbow Research, please proceed.

Good morning, everyone.

Morning.

Sorry, Didier, if you could please repeat -- I missed the first question, my cell phone dropped so maybe you can help me out with that later, but what were the organic sales assumptions going into '11 for the various segments, did you mention that?

Yes, I gave what was consistent with the high end of our guidance, which is $6.3 billion and EMG on an organic basis growing 10%, LSG 114%, and CAG 7%. And that's 10% for Agilent overall, but you know that the middle point of our guidance is 8% growth, so you need to shave off somehow two percentage points from some of those. Mostly in the low end of our guidance, we -- probably I would take away a little bit more on the EMG side depending on macroeconomic conditions.

And that's all organic?

Yes, all organic.

Do you have any currency baked in there?

It's all our guidance is based on the exchange rate as of the beginning of our fiscal year.

On the $100 million savings in Varian that you stepped that up now, how do those savings spread out over the next couple years and is it split basically between how the revenue splits between the two segments or is one going to get more the -- has more lion's share of the savings, if that's possible as we look forward.

It is basically into three buckets. One we call our global infrastructure and that will be done in our fiscal year 2011. This is, again, all of the corporate functions that are being combined. Some of it, of course, we've already seen just as a result of the combination of the Company and the executive team on Varian essentially leaving the Company. From there, the first order is to split it by revenue, but the bias will be on the LSG, the NMRs where we have the biggest cost of sales opportunity, and as we have said, we will implement this over the next few years. And it's all about our ability to execute, transfer products and get new products into the system and it's all about time. But I'm very, very pleased with the progress both Mike and Nick have made in terms of addressing that and again, the alignment with all our 3,000 new employees. They're very excited about both the opportunities investment and also the understanding the responsibility that we need to improve our gross margins as fast as we can. But I would first order do it by revenue, a slight bias to LSG and assume this over the next couple years.

Okay. And still probably fair to assume that it's more front end loaded over the next two, three years?

No, on the manufacturing it will be back end loaded just because of the qualifications. The global infrastructure costs will be front end loaded.

Okay. Thank you.

Your next question comes from the line of Isaac Ro representing Goldman Sachs, please proceed.

Good morning. Thanks for taking the question. Just first off wondering if you could spend a minute on China and your outlook for that region going forward. I believe there are a couple of government stimulus programs there that could be rolling off in some of your end markets. So I am wondering if there is any reason to think that that dynamic could offset some of your core organic growth in that region next year.

Yes, again, there's lots and lots of noise in the press in terms of what's going to happen in China, what are they going to do in terms of addressing inflation, what's the next five year plan. Obviously to date we are in a very, very strong position and have made a big investment. What I'm going to do is ask each of the presidents to make a comment. We all spend an enormous amount of time in China. We have in fact just recently met with our local teams and we're obviously quite confident of the guidance that we just gave. But I'll start with Ron and have him talk, given how much of his business is shipped to Asia and then have Nick and Mike give comments in each of their respective markets.

Well, first of all 40% of our overall business, roughly, is in Asia right now and, again, we continue to see that outpace the rest of the world and for us to be very strong and growing our overall percentage of business that is in Asia. We've just a matter of fact put a new sales manager in place who will add tremendously to the region, but, again, we're very, very excited with what we have there. Different technology that is flowing in the TDS CDMA area, which is the 3G technology, is adding a lot to our overall business and we're also seeing some activity in R&D on the 4G side. But again, our business in China is exceptionally strong and we continue to expand where we're adding 30 new field engineers and application engineers to keep up with the revenue growth and as I men'd, continuing to expand the structure in China so we continue to outpace the market growth.

For the life science group, a couple comments. First comment is we've really been seeing tremendous growth in Asia in general and in China and while it's not quite the dominant sector, it is one that would have dominance probably this quarter. The addition of Varian actually gives us a great opportunity. They were not heavily penetrated in life science in terms of the China mix and so we have an opportunity to accelerate that penetration. The general China market comment you made, you're right, we're rolling to a new five-year plan and you're right, there was some extraordinary stimulus at the end of this five year plan, which is ending this year. But what we're seeing so far is that, at least in the life science and healthcare markets, I think Michael echo comments, and so when I pass to him, he can. But in the life science and healthcare markets we're seeing strong sentiment coming in the five year plan that's rolling out now to continue strong investment there and so we're very optimistic that not only are we positioned properly, but the market itself is very robust.

Yes, Nick, thanks. Just to build on Nick's comments what we're seeing in the Chemical Analysis side. Short-term commentary, business remains quite robust in China, one of the major drivers for our performance in the most recently completed quarter. Your question's really around the long-term outlook. We remain quite positive in terms of the outlook for China. I know there's questions about the five-year plan, as you alluded to. But we just hosted a very large delegation here in the area of food safety and it's very clear to myself that this will continue to be an area of major interest of the Chinese government. There are major funding and a great opportunity for Agilent with our expanded portfolio.

Great, that's very helpful. Thanks. And then just secondly on pricing, I know there was a little discussion there earlier and I'm wondering if there was any sort of sequential change that you saw in the pricing environment this quarter and then maybe for next year, what your assumptions are for contribution from pricing. It sounded like you didn't have much baked in.

No, we're pricing, unless there is something dramatically changes in the economy, pricing won't be a factor in our performance next year.

Okay. Great. And then just last question I would ask would be on maybe a couple of product specific items, thoughts on the market share dynamics that you're seeing in your life science business for mass spec and HPOC. You have added some great new products there and just wondering how they're doing. And then just secondly on 3G, there's some talk there about how network demand is progressing. I'm just wondering where you're seeing the most strength regionally.

So I guess I'll let you calculate specific share, but I'll make a couple of quick comments on the mass spec and on the LC products. We believe that we've launched a triple quadripolar instrument with the highest performance in the market. We believe that we're pretty close to the high edge, if not at the high edge in our Q-TOF product. We are doing very, very well in our single quad products. Again, we think that's a technology play. So our expectations on ramp to volume are above our plans and we're very pleased with that. And we believe we're strongly outgrowing the market in terms of those products. On LC we've quoted you a 21% growth for the quarter. And we believe that that's probably almost 4X the market on instruments, somewhere between 3 and 4X. So there is some market expansion in terms of UHPLC. There is some market expansion in terms of new biologic entity for mass spectrometry. But you can do the math against our peers and competitors and get a share view.

With regards to our new products and what's going on with share, again, as Nick has mentioned, I'll let you calculate the share, but just to give a couple of stats. On the digital side our orders were up 76% this quarter and for the full fiscal year our orders were up over 50% for oscilloscopes. So that's, I think, will be easy to see how we're doing there. And if you look on the wireless side and look at our network analyzers, spectrum analyzers and signal sources, which play into that, the growth rates were all over 40%, up to 58% during this last quarter. So we're seeing very solid healthy growth due to the strength of our portfolio and in many cases you can see we are taking share.

Okay. Thanks very much.

Thank you.

With no further questions in the queue, I would now turn the call back over to Alicia Rodriguez, Vice President of Investor Relations, for closing remarks. You may proceed.

Thank you, Keisha. On behalf of the Agilent management team, I'd like to thank everybody for joining us this morning. If you have any questions, please contact us at Investor Relations and thank you and good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.