安捷倫 (A) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Agilent Technology Earnings Conference Call. My name is Derek and I'll be your operator for today. At this time, all participants are in a listen-only mode. Towards the end of the conference, we will facilitate a question and answer session. (Operator Instructions)As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Ms. Alicia Rodriguez, Vice President of Investor Relations. You may proceed.

Thank you and welcome everyone to Agilent's First Quarter Conference Call for Fiscal Year 2011. 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 results. Didier will then follow with a view 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 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 outs and historical financial information for Agilent's continuing operations. 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. 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. Before turning the call over to Bill, I would like to remind you that Agilent will host its annual Analyst Meeting in New York City on March 3. Details about the meeting and webcast will be available in the coming weeks on the Agilent Investor Relations website. Now, let me turn the call over to Bill for his comments.

Thanks, Alicia, and hello, everyone. Agilent's Q1 orders of $1.63 billion were up 33% year-over-year, while revenues of $1.52 billion were up 25% from a year ago. Without the impact to the Varian acquisition and recent divestitures, orders and revenues were up 22% and 19%, respectively. Overall, financial results were excellent. Non-GAAP EPS of $0.60 exceeded expectations and Street consensus. Agilent continues to demonstrate the strength of its product portfolio as all key platforms grew revenue by double digits for the third consecutive quarter. All regions posted double-digit organic revenue growth.

Our Electronic Measurement business posted its second consecutive quarter with a 20% operating margin. Q1 revenue of $771 million reflects 23% year-over-year growth. Excluding the network solutions divestitures, orders and revenues both grew 31% organically. We saw continued strength momentum across markets and regions. Aerospace and Defense revenues grew 11% organically from a year ago. Communications markets were up 45% year-over-year driven by our industry leading position in LTE and 3G test solutions. Industrial, semiconductor, and computer markets grew 31% organically, led by our oscilloscope business. Our scope revenue was up 70% year-over-year.

Tomorrow, we're introducing a new family of value oscilloscopes which have the best price performance in the industry. These 26 new models of 70 to 500 megahertz scopes represent the largest ever oscilloscope introduction. In our Bio-Analytical Measurement business, we saw a gap between orders and revenues in our Q1 results. During the quarter, we started the process of transforming Varian's quote to cash process to the Agilent system. As a result of issues related to end of month pipeline logistics, revenue for Varian-based products came in at $30 million below expectations for the quarter. Life Science and Chemical Analysis were both impacted by the revenue shortage. Life Science business revenues were up 19% to $404 million, up 7% organically. Orders grew 11% organically.

Operating margin, including Varian, was 12%. We saw strong growth in Academic and Government with 12% organic growth driven by year-end budget spending. Pharma and Biotech was up 6%. Life Science platform performance was strong, particularly in LCs to mass spec. We're seeing acceleration in instrument replacement cycle. We also saw a strong demand for our genomics, OpenLAB Informatics, automation, NMR, and MRI products. The Chemical Analysis business saw revenue growth of 43% to $349 million, up 8% organically. Orders grew 16% organically.

Operating margin, including Varian, was 19%. All market segments demonstrated solid organic growth led by Petrochemical up 12% year-over-year. Momentum in the US is being driven by replacement business from recovering industrial markets, as well as by food safety and alternate energy programs. From a product perspective, we saw double-digit revenue growth in GC and GCMS. Moving on to Agilent, our backlog increased by $100 million during the quarter, the seventh consecutive quarterly increase in our backlog. Our number one priority is to increase manufacturing capacity in Q2 and throughout the rest of the year.

For the second quarter of 2011, we expect revenues in the range of $1.59 billion to $1.61 billion. Non-GAAP earnings are expected to be in the range of $0.63 to $0.65 per share. We are raising our overall guidance for 2011. For the full fiscal year, we expect revenues in the range of $6.3 billion to $6.4 billion with earnings per share in the range of $2.53 to $2.63.

Thank you for being on the call. Now, I'll turn it over to Didier.

Thank you, Bill and hello, everyone. I will start by providing some additional color on our first quarter results and then comment on our outlook for the fiscal year and for Q2. As in prior calls, all my comments will refer to non-GAAP figures. So, starting with Q1 results, as Bill mentioned, Agilent is off to a very good start to the year with an excellent first quarter performance -- orders of $1.63 billion, up 33% from one year ago, both in dollars and local currency. On an organic basis, orders increased 22% year-over-year and all three business segments generated double-digit order growth. Organically, orders grew 18% in the Americas, 11% in Europe, or 17% in local currency, and 33% in Asia Pacific or 29% in local currency.

Orders for the ex-Varian products and services were close to $190 million, reflecting planned revenue synergies. Revenues of $1.52 billion were up 26%(Sic-see press release) year-over-year, both in dollars and local currency, or 19% on an organic basis. By region, revenues grew organically 24% in the Americas or 23% in local currency, 11% in Europe, or 16% in local currency, and 21% in Asia Pacific or 17% in local currency. Organic revenue growth percentages in China and India were in the high 20%s. As Bill mentioned, revenues for the ex-Varian products and services $134 million were $30 million short of our expectations. Moving to the income statement, first quarter non-GAAP operating profit of $270 million improved $89 million from one year ago on the $311 million increase in revenues, a 29% operating margin incremental. Excluding Varian, our operating margin incremental was in line with our 30% to 40% commitment.

As guided, operating margins of 17.7% were slightly down sequentially due to the December salary increase, front loading of stock-based compensation, and the increase in payroll taxes due to the disbursement of the second half fiscal year 2010 variable and incentive pay. Delayed hiring and spending offset the negative impact of lower than expected revenues. Interest expense was down $4 million sequentially as we paid back the $1.5 billion world trade debt in December, two months before it matured.

Moving to taxes, we have adjusted our non-GAAP tax rate down to 18%, mostly to reflect the extension of the R&D tax credit. Non-GAAP net income of $212 million or $0.60 per share compares to $135 million or $0.38 per share one year ago, an increase of 58% year-over-year. Turning to the cash flow and our net cash position, total cash from operations during the seasonally low first quarter was $120 million, an increase of $90 million from one year ago. This was achieved even as inventories were up $81 million in response to expected revenue growth and the Q1 revenue shortfall.

During the quarter, we received $136 million from employee stock programs and repurchased $270 million worth of shares. We will continue the present buyback program intended to keep the basic outstanding share count at roughly 346 million shares. With regards to net cash, we finished the quarter with net cash of $554 million.

Now, turning to the fiscal year 2011 outlook. We are raising our revenue guidance to reflect Agilent's strong competitive position in all of our core product lines and across all regions. We now expect revenues for fiscal year 2011 of $6.3 billion to $6.4 billion, which, at the mid-point of the range, represents a 16% year-over-year revenue growth or 12% on an organic basis, EMG 14%, LSG 10%, and CAG 9%. Consistent with our 30% to 40% year-over-year incremental operating margin commitment, we are also raising our EPS guidance to $2.53 to $2.63, based on 356 million diluted shares.

This higher guidance represents a 29% year-over-year EPS growth at the mid-point of the guidance. There's no chance to increase commitment to generate $100 million of net Varian cost synergies within three to four years with roughly 50% of the savings flowing by the end of fiscal year 2011. Finally, moving to the second quarter guidance. We expect Q2 revenues of $1.59 billion to $1.61 billion and EPS of $0.63 to $0.65. At the mid point, year-over-year revenue growth will be 26% or 15% on an organic basis. The mid-point of our EPS guidance corresponds to year-over-year EPS growth of 49%.

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

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

(Operator Instructions)Your first question is coming from the line of William Stein from Credit Suisse. You may proceed.

Thanks. Guys, you talked about a $30 million delay, related to supply chain it sounded like. Can you dig into that a little bit, explain to us what happened and in which segments the revenue was affected?

Yes, again, Will, it was not supply chain related in the classical sense. It was related to the logistics of the conversion to the Agilent quote to cash process. We had $30 million of shipments that essentially revenue was not recognized, $20 million of that was in Chemical Analysis, $10 million of that was in our Life Science business.

Okay, and you also spoke about the full year revenue guidance and I think you briefly touched on the growth rate by segment. Can you please go through that again, maybe on both organic and an all-in basis?

Sure. So, I provided the detail by segment for the mid-point of our guidance, so the mid-point of our guidance is $6.35 billion. And on an organic basis, organically, that corresponds to EMG growing 14% organically, LSG growing 10% organically, and CAG growing 9% organically.

Okay. And then one strategic or more operational question, I guess, is around your position in 3G and LTE tests. I know that over the last couple years, your position in the handset manufacturing test has eroded a bit. I know you've announced some new products in that area and you talked about it being strong in the quarter, I think. Can you elaborate on what the product plans and your anticipated success in the future in that market is?

As I had noted, we had a very strong quarter with 45% growth in LTE and 3G and I'm going to have Ron describe what our product position is in LTE, as well as the overall market. Ron?

Hi, Will. This is Ron. There are 17 different product lines that we have that participate in the LTE ecosystem and in the ecosystem for 3G. So, sometimes it's brought out there that there's one product or two that makes all the difference. But it's a broad spectrum of products that we have from design simulation software to semiconductor parametric testers to test the chips to component testers to test the components to signal sources, signal analyzers, design validation scopes, digital RF analyzers, one box testers, pre-conformance systems, power supplies, calibration testers, verification testers, so the list goes on. But the reason why I bring this up is, we have a very broad portfolio, and as Bill had mentioned, we grew 45% in our communications business and our position is number one in 2G, 3G, and in 4G wireless.

And during our Analyst call in March, I think you'll be pleased that Ron and the team have dug up 10 years of data for final cell phone testing and so we're going to show you that on March 3. And it will be quite interesting to see, at least from our viewpoint, just what one segment of the overall market is, again, the handset final test.

Great. Appreciate it. Thank you.

Your next question comes from the line of Ross Muken from Deutsche Bank. You may proceed.

Hi. Good afternoon, gentlemen, and congrats on a great quarter.

Thank you.

How do we think about the margin progression as we head into the second quarter? Obviously a lot of moving parts by segment, particularly with some of the revenue pull through which we didn't have from Varian. How should we think of that in terms of the evolution, particularly on the Life Sciences, Chemical Analysis pieces where we saw the sequential declines here?

Yes, I mean, as you know, we're not providing guidance by -- for all of the different lines of the P&L. Just the top one and bottom one, EPS, but we are projecting the mid range of the guidance, our EPS to grow at $0.60 in Q1 to $0.64 in Q2. Obviously, with the help of a healthy revenue growth as per our guidance. The other thing that you will see is that on one hand, we had one-time items in Q1 that will not impact Q2. On the other hand, in Q2, you will see an increase in general in costs and expenses every single year.

It's a normal seasonality factor during Q1, expenses tend to be fairly minimal because of the significant break and in Q2, they start going up. So, you have those two factors. Also in Q1 we had two months of (inaudible) increase and in Q2, we'll have obviously three months. Our increase was effective December 1. So you have all of those factors, but all together, along with the increase in revenue, they result in EPS going up $0.04 at midpoint of our guidance.

But our gross margins will in fact increase and I would just assume that it will be somewhere between our Q1 actual and our Q4 of 2010. And as you may recall, the gross margins of our Varian products tend to run lower than the Agilent product lines and of course, we're in the process of fixing that discrepancy.

No, that's perfect, Bill. That's what I was pointing to. Just quickly, in terms of the emerging market growth, you had some pretty substantial growth both in China, India, et cetera. And as you look at key product areas in those regions that are having the most success or maybe it's easy to look at it based on end customer market. Where are we seeing the most substantial demand, particularly in those end markets?

Yes, I'm going to have Ron comment. If you look at the actual performance in Q1, the growth in Asia was driven by EMG. LSG and CAG growth was impacted because of the below expected revenue. But I'll have Ron comment on his growth in Asia which was 33% and also Nick, I think had also, had less impact than Varian had a strong growth in Asia as well on the LSG side. So, I'll have those two group presidents comment. Ron?

If we look at orders, orders in Asia Pacific were even stronger than EMG with 49% order growth and that was really driven by the wireless ecosystem, the wins that we're starting to have for LTE as well as in the smartphone rollout that is in 3G. China was extremely strong and we continue to build very, very strong momentum there.

This is Nick. I'll just add our Asia numbers and orders were really strong double digits. Even Japan had decent numbers. We did have most of our trapped revenue problems show up in Asia revenue, so that's where we were most impacted by our actual logistics problem for revenue in LSG.

Great. Thanks.

Your next question comes from the line of Jon Groberg from Macquarie. You may proceed.

Hi, thanks for taking the questions and wish everyone a happy Valentine's Day. So can you just clarify on the $30 million shortfall? Is that just a delay or a shift of all of Varian's revenues given the conversion to Agilent's quote to cash system?

It's just a delay, Jon. We just basically ran out of time. Our processes are quite a bit different than Varian's. Again, the team did, I think, just a superb job of converting to our quote to cash, that our customers now see us as one Company. But quite frankly, we just ran out of time and $30 million was trapped, either shipped and not invoiced or trapped in our logistics centers, and not fully shipped or recognized by the customer.

So you just expect that will obviously flow throughout and hopefully, it's already transferred out as we speak moving forward. But clearly our expectations for the quarter were below by that $30 million. Fortunately, we had a higher, more favorable mix of the older Agilent products and very well-controlled spending, which resulted in a solid bottom line performance.

But so, just to be clear, in the second quarter you'd expect to recognize all that $30 million in addition to whatever you were anticipating previously from Varian?

That's correct.

Okay, and then just another question on revenues. You don't have a ton of backlog, at least historically. I know it's higher right now but, I guess, but what do you see out there in the markets that gives you the confidence for the full year to raise the numbers like you did?

Yes, I think I'm going to have each of the Presidents talk in terms of their view. But there is no evidence whatsoever of a fundamental slowdown in capital purchases in any of our nine major market segments. Obviously, some concern long term in Aerospace and Defense. And everyone continues to look at the semiconductor market, but of course that can be offset in a lot of the other spaces. So, I'm going to start off with Ron, then Mike and Nick just to talk a little bit about their end markets and why today we think that F2011 has continued to be a strong year.

If you first look at the communications market, as Bill had mentioned, our orders were up 45% and that's being driven by the rollout of smartphones, tablets, and other computers. And the results there are strong and also the demand that we have, we have seen no slowdown. A matter of fact, we have customers asking for more products than we can deliver and that's why our backlog continues to go up, but the demand is strong.

Another area in the general purpose market is the computer market, and as we look at our oscilloscope business it's exceptionally strong. Bill had mentioned that we had 70% revenue growth in oscilloscopes and you've seen some of the competition report some good growth numbers, but I think our 70% growth is very, very strong. A matter of fact, on top of that, our order growth in oscilloscopes was over 90%.

And that is not only strong, as Bill had mentioned, during the next 24 hours, we are rolling out a family of 26 products that bring the technology and capability from our technology design centers and new A6, from our technology development in Agilent Labs and A to D converters to bring out an exceptional family of products that will complement the strong growth that we've already seen. So, we see it on the product front and we see it on the end market front. And as Bill had mentioned, the only caution is the Aerospace Defense market, which we're not expecting its growth to be as strong as the other segments. Mike?

Sure. Let's start geographically. So, we're seeing, as we reported, very strong growth across all major geographies. But the business is still being led geographically by our Asia growth. And as we've shared with you earlier, we believe our footprint is really solid in Asia to capitalize on these long term growth opportunities and we see no slowdown coming in FY11. If you look at some of the market sub-segments, chemical and energy, we're seeing very strong replacements in places like the US and Western Europe. We're also seeing movement in the research areas we pointed to, for example, in the area of alternative energy research funding. So, good core replacement demand in the QAQC environment, but also increases in R&D funding, particularly through government-funded activities.

In the food market, still high growth in Asia driven by both needs to meet regulatory requirements on a global basis, but also more indigenous type regulations being passed in places such as China and India, a major push in China, for example, and we're ready to capitalize on that. The environmental space, again similar story around quality of life improvements being demanded by population. So, good regulatory driven growth across both the food and environmental segment.

And then maybe just one final comment here, I wanted to comment on this earlier, we talked about the quote to cash and the $30 million revenue shortfall. I think we also want to just keep in mind what we are trying to accomplish on November 1, which really was the combination of the sales force. And we pulled that off and we're seeing the benefits in terms of the top line order growth. I think we've posted about 16%, about twice our organic revenue growth rate. Nick?

Yes. So, I'll just close off, echo the same comments about the global regional growth. But specifically, pharma, we're seeing some real strength continue and a pull forward we believe of big pharma replacing instrumentation and we think that'll continue now for another two years perhaps. And then, we're seeing the geographic displacement of therapeutics and we're really doing well in the Asia markets, as well as other brick countries which are coming on.

And in the Academic Government sector, while we had a nice year-end bloom, it looks really solid. Peoples' budgets were just locked in. So, what happens in our next fiscal year is hard to tell in Academic Government. But for this fiscal year, the budgets seem to be rolling globally and we seem to be enjoying really strong order performance with no downturn in the near term future.

Thanks a lot.

Your next question comes from the line of Jon Wood from Jefferies. You may proceed.

Hi, thanks a lot. Bill, you closed a little deal a couple days ago, I think it was in atomic spectroscopy. Was that material? And then in addition to that, can you just give us a view on where the M&A pipeline is as you see it today? I know you're approaching the anniversary of the Varian deal and would love your updated thoughts on Agilent's enthusiasm in the M&A market.

Right. I think, and again, Mike can give some color commentary. The acquisition we made is, I think, very key for Mike's business in Chemical Analysis. It's not material from the Company in the sense it's going to have a major impact on revenue growth or earnings.

We continue to actively look at acquisition opportunities in the marketplace. We continue to be very, very disciplined on looking at these opportunities to ensure that we can return high quality earnings and return on invested capital to our owners. So, again, as you said, we're in a net cash position. The integration is going well. This $30 million glitch in the quarter, I think, is not material whatsoever. So, we will continue to look for opportunities, but we will continue to be very, very disciplined in our evaluation of these opportunities.

Bill, if I could just add some comments. So as it may not be material for overall Agilent, but the acquisition of A2 Technologies is really quite material for Chemical Analysis group. This is all part of our strategy to build a leading position in spectroscopy, specifically, this Company is in the FTIR business. And the portfolio and technology we're bringing the Company very much complements that we acquired via the Varian acquisition. So, we're very excited about the possibilities there.

Mike, if I can just follow-up, I think we were talking about chemical analysis at 7% organic at the top end of the range last quarter and now we're talking 9% at the midpoint.

Yes.

It seems like a pretty big move, so what's really changed for you? I know you got some tough stimulus comps in the April quarter. What's really changed your view in the end markets for such a big jump in your guidance there?

Sure, Jon. Appreciate the question. So, I think I would point to two things and I kind of alluded to it earlier, which is just the bump in the business we're getting through the combined sales forces. So, in particular, Asia, we're seeing this outstanding growth, have won a number of large orders in the first quarter; so very bullish about the opportunities to grow the business, particularly in Asia with the combined sales force. So, I would say the view of the potential top line synergies from the Varian acquisition, as well as, I mentioned earlier there's more money coming into the R&D side of the Chemical Analysis space. So, as we'll share in our Analyst presentation, we're about a $10 billion market but about $3 billion of that is focused in research and we're seeing good funding going into those spaces as well.

And as Mike said, I mean, the orders in Varian in the quarter, the 190 million, I mean, we're really getting some real momentum as Mike alluded to on the Varian product families. And that's always the big issue on acquisitions is the short-term distraction, so very, very pleased from my perspective on the progress that's being made in both the CAG sales force, as well as the LSG sales force.

Bill, you just said 190 million?

Correct. Yes.

Okay, I didn't hear that. Thanks a lot. Great.

Yes.

Your next question comes from the line of Isaac Ro for Goldman Sachs. You may proceed.

Hey, thanks very much. First question on Varian, I appreciate the color on the revenue recognition that you guys talked about. If we just adjust for that one-time event, so to speak, and we look at the overall end market dynamic, is it fair to say that you don't see any real market share base factors impacting your business just given that some of your competitors had pretty good quarterly results?

If you, in fact, look at our order intake, we feel that we are more than holding our own. From a revenue perspective, we will not compare as favorably. But from an order perspective, we're gathering momentum and we will quickly catch up.

Great, and then just second item on the funding environment between the academic and pharma end markets you serve. I think you said pharma was up 6%. Just wondering what your outlook is for that end market this year? And then, just regarding some of the news we saw today on NIH funding, if you have any thoughts on how that market might shape out? I know you mentioned it's uncertain, but how are you guys planning for the long term there?

I'm going to have Nick respond to your question.

Yes, so first the pharma market. I'm still pretty positive about it. Remember that I characterize all global therapeutics in that swath. So, what we're seeing is we're seeing Big Pharma, solid single digits. And so as long as they're mid single digit, the rest of the global therapeutic market is really pushing into the double digits. So, we think that market's going to be sort of five to seven range and we think we should be able to take some good above that rate in terms of orders and growth. So, we're pretty optimistic for the rest of the year.

On the NIH budget and government budgets in general, if you look in the sectors we serve, which are really in the OMEC sectors, NIH has really not been impacted, at least so far. So there's a lot of things moving through Congress, but the sectors we serve we don't think we're going to see impact negatively. And in fact, the point I was making is, we're in the actual middle of a government fiscal cycle. And so, unless there's some extraordinary budget cuts done in Washington, we think this year will continue with pretty good momentum in our sector and globally, that's the story as well. We don't see any cuts coming in the next couple of quarters that would effect our trajectory in academics.

That's great. That's very helpful. Last one would be on the electronic measurement side with the LTE. I think you mentioned new products and there's obviously the -- a conference next week. Just wondering if you look at the kind of demand that you're seeing for your test equipment there, how does it differentiate between the handset providers and the carriers?

Yes, most of our products are sold directly to the handset providers and the component manufacturers. So, whether you look at people that are making components or people that are putting together reference design kits, or you're looking at people that actually build the handsets or the base stations, that's where our products get sold. And the Mobile World Congress started this week, and we have a whole series of introductions, including leading not only in LTE but in LTE advanced, which is the Next Generation of LTE, we're already introducing products and tools that are the first in the world for this new LTE advanced standard. And again, that's just in the early phases of R&D at this point, but we have broad products across the spectrum.

Great. Thanks so much.

Your next question comes from the line of [Nadit Kusho] from Barclays Capital. You may proceed.

Hi, thanks for taking the questions. Bill, I'll start with a really high level question on Varian. Many of Agilent's Life Science competitors are now seeing rebound to 2008 levels in terms of revenue. So, how does one think about Varian within that construct, going back to 2008 revenues of $1 billion, $900 million ex-divestitures and Varian today?

Yes. The big compare is really in the electronic measurement business because they're the ones that drop by $1 billion, then you have to subtract the NSD or network divestiture business, and we are faster, if not approaching the 2008 level. In the Chemical Analysis business, our business only dropped 10% in 2009 and so organically, we are going to easily surpass that. And on the Life Science business, our decline was only in the 1% or 2% range. So, our analytical business was not impacted very much during the 2009 downturn and of course, Electronic Measurement business is coming back dramatically from that downturn -- just dramatically. And in addition to that, and again to put a plug into Ron and the team, we took the opportunity to fundamentally reset the operating margins in the business and that's the reason why Ron's business is exceeding 20% operating margins per quarter.

Bill, I think I was trying to get a reaction specifically on the Varian business. So, looking back at Varian in 2008 that was a $1 billion revenue run rate. So, assuming about 10% divestitures, how does that piece look today and what is the plan or what's the expectation around that coming back to a $900 million run rate?

Yes, it's a great question and one that's quite hard for us to answer. Quite honestly, after Q2, you'll never hear Varian again because the year will be up and everything will be organic growth. The situation we have is, first of all we had to divest 10% of the Company based on EU and Federal Trade Commission requirements, so we've got that aside. Secondly, we've gone through a process of rationalizing their product lines and the ones that were overlapped with Agilent, of course, we've already absorbed into the Agilent products. The third part of that is that we have again focused on key platforms in the process of transforming them. So, if you look at the overall order rate of $190 million last quarter, we are fast approaching the $800 million. So, if you take the $800 million, take out 10% from your reference point in saying that we basically had to divest that, we still have a little bit ways to go to catch up to the 2008 level with the Varian core products.

Quite honestly, what gets lost in the noise is that we're also rationalizing that portfolio and we will drive the old Varian product lines to our operating model. We will not sustain product lines that we can't get to 20% operating profit. So, I would ask that question again at the end of 2011, but I am highly confident that when we are done, we will have a minimum of $800 million to $900 million of revenue that will be at the Agilent operating model.

Okay, that's very helpful, and I have a very quick one for Nick. We saw pretty robust Agilent presence at AGBT a couple of weeks back. And Nick, I was wondering if you could give us a little bit of color on Agilent's genomics piece, specifically, and around what the plans are to broaden that product line out a little bit beyond just exome sequencing.

Yes, sure. We are just delighted with the performance of the products we have in genome partitioning or exome sequencing and we see that there's a shift going on. We think that there's a new sector being created around next generation sequencing that is driving this genome partitioning market. We've actually seen several of the big box players in the space move into that sector and that's great because it validates the sector. So, we think we have the best product and strongest portfolio. We've already moved to automate, so as you saw in AGBT, we now have full robotics and automation on that partitioning front end. And we're going to continue to expand in that sample prep and automation side of the sequencing platform. And those were some of the things we discussed at AGBT, and we seem to be capturing mind share as this new market of genome partitioning is expanding rapidly.

Any color on how big that piece is within Agilent's Life Science?

Yes, we haven't said how big the piece is. We think we're one of the largest players in there and that's moving past $100 million as a market fast. So, we haven't really given you details on that and hopefully, we'll be in a position to do so at some point.

Okay, great. Thank you.

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

Good afternoon, everyone. You mentioned the backlog increased $100 million. Can you break out where the increase was by segment?

Well, almost all of the increase was in the Chemical Analysis and Life Science. Ron's business in EMG had still a greater than one book to billed.

Do you want me to give the number? So, about $26 million for Electronic Measurement segment, about $40 million for Chemical Analysis, and about $40 million for Life Science.

Great. That's very helpful, thank you. Ron, I want to ask you about the -- congratulations on the o-scope performance -- but the new line of o-scopes, there's been a lot of press on this and it seems to be a pretty big deal. Can you discuss a little bit about the price points, where you expect it to be as far as the competition? And do you think you'll be able to maintain roughly where your gross margins are right now?

Yes. So first of all, we have three different segments in oscilloscopes -- high performance realtime scopes, sampling scopes, and value scopes. Our high performance scopes where we introduced brand new products last year and our sampling scopes are growing very, very , over 90% growth. This segment is -- this product is aimed in our high value oscilloscope line. We will be able to maintain the gross margin. We've spent a lot of time developing very cost effective solutions with custom A6 and custom A to D converters in Agilent Labs and the technology center, and it also brings new things to the market they've never seen. For instance, this has four instruments built in one -- a traditional oscilloscope, logic analyzer features, function generator features and protocol analyzer features. So, we believe we'll be able to maintain the margins and take our growth rate from about 80% in this last quarter in the high volume segment to a point where we'll be able to continue that growth as we go further and continue to take market

And you don't see this cannibalizing from the sampling scopes or from higher end scopes at all? There's enough differentiation between all of them?

Yes, they're at completely different performance level and price levels. They don't overlap at all, compared to those other two segments.

Historically, this has been the segment of the market where we have not spent a lot of attention. And again this is for decades and decades where we have focused on the high end, as Ron talked, and as well as the sampling scope. And so, this 26 families goes right at the heart of the segment of the market that we have historically ignored and so we're very, very excited.

This is a product segment where Tektronics has been there. These products start at about $1,200 and go up from there. But they're very, very cost competitive and we'll look forward to their results.

Okay. And then finally, just looking at the order rates with the book-to-bills, all but one or all of them; but sequentially, orders tick down a little bit. Is that normal seasonality? Anything to read into that or what?

Personally, from my perspective, Q4, the end of our fiscal year, is always the highest order rate in the year and, needless to say, tied to end of year commissions. I was very pleased on the Q1 order rate and essentially only being down a few percent from our Q4 rate. So, I personally interpret it as good news.

Okay, thank you.

Your next question goes from the line of Richard Eastman from Robert W. Baird. You may proceed.

Yes, good afternoon. Ron, could you just talk to, for a second, the core LC growth rate in EEM was bumped up to this 14% number. Is the biggest factor there -- or maybe rank the factors there, an acceleration in the COM spend or is it the better performance and outlook for the GP side of the business?

The COM segment is the strongest port. The COM segment, for instance, this last quarter grew 45% and the GP business grew 24%. So, there's no doubt that not only in the last quarter, what we're seeing with our position in LTE, taking business in Research and Development for handsets, and taking business in production or manufacturing for base stations, we're having some tremendous success in those areas. But we are seeing a broad rebound compared to what was a very low 2009 level in the recession and we saw strengthening last year of roughly around 30% order growth and this year, we're seeing that continue. The compares will get tougher but as Bill has mentioned, we have done great work on our business model, set up the right structure and weaned our product line. So, that's why we're producing 20% operating margin and 34% ROIC in Q1, and why we're at a completely different level of contribution than we were a year or two ago.

Well, you pick up some margin -- I guess, incremental margin, contribution margin from the COM growth rate, I would assume. But again, it wasn't that long ago, perhaps a quarter or two, where people were very spooked about the GP side of the business. And presumably, you're feeling much better with a 20% growth rate than the prospect at the time was potentially flattening out. So, I mean, just when you're looking at the delta to your last forecast, and this one is probably easier to understand the COM acceleration, but it sounds like you're much more confident in the GP side of the business.

Well, there's three different pieces in GP. We have the general industrial market, we have computers and semiconductor, and Aerospace Defense. The computer and semiconductor markets are growing rapidly. Now, obviously the growth rates in semiconductor have come down, but they're still very hot for us right now and still over 50%. The computer business, we've talked about that, which is driven by our oscilloscope business, seeing very strong growth. The only area that we're very cautious about is the Aerospace Defense area due to the government spending policies with this continuing resolution that's going on. But overall, we feel comfortable, very comfortable with the guidance that we forecasted.

Okay, and then just maybe for Didier, just a quick question on the gross margin impact of Varian, can you just give us some sense of what that was in the LSG group and the CAG group? It's probably difficult to do, but if you're just looking at gross margins, I think LSG was down 100 bps year-over-year and the CAG was down 400 bps. How much of that might be thought of as Varian?

Well, the one thing I can say is the bio-analytical measurement businesses, where they are year-over-year incremental on an organic basis was solely in line with the 30% to 40% incremental. So, Varian did have an impact under like when revenue, Varian revenue was about $170 million, we had an operating margin for Varian of about 6%. So, you can imagine that $135 million, you're much closer to the breakeven point and that had an impact, obviously, on the LS and CA. But without Varian, their year-over-year incremental operating margin would have been totally in line with their commitment.

Okay, and then just the last question I have, and I may have just heard this incorrectly, but Nick, in your group, is the core growth rate, did you say plus 10?

What Didier gave you was a midpoint of our range, so just use the midpoint of Agilent, LSG could achieve 10%. That would be at the midpoint of the Agilent range. That's what he gave you.

Were we -- previous to this were we thinking plus 12 to 14?

In the previous call, what Didier said was at the high end of the previous guidance, LSG would be 12%, so I think we're not moving those numbers around on you.

Okay. All right, I got it. All right, thank you. Very nice quarter, guys.

Thank you.

Thank you.

Your next question comes from the line of Anthony Luscri from JPMorgan. You may proceed.

Hi. Thanks for taking the question. I wanted to dig in a little bit more on the Electronic Measurement, specifically to -- you seem to be balancing up against the prior guidelines that you gave us after your restructuring for operating income and ROIC, yet you're well away from the peak revenue. How should we view the operating margin profile of EM looking ahead into fiscal 2011?

I'll have Ron make some comments about where it is. The big issue that we have -- we actually have in the Company is to continue to expand our manufacturing capacity, lead times for Ron are the longest in the Company. One should look at it that the investments that we've made in places is that Agilent will have an online capacity in Q1 of 2012 of $7 billion, and that is the big challenge, is to get continue to get our capacity up so that we can, in fact, drive forward. As Didier said, we are absolutely committed to continue to drive our increment and Ron has the highest hurdle. So, I will have him talk about his hurdle rate and therefore, the corresponding margin he'll drive as he increases his capacity.

Yes, we've committed to deliver 40% incrementals on the incremental revenue and we've been delivering in excess of that as you've probably seen and noticed. For instance, this last quarter, our incremental was 55%. Now at some point, that gets back down, but we are committed to delivering the 40% incrementals and we delivered 18% operating margin in Q3, 20% in Q4 and 20% in Q1. And as we go forward, we think we're very comfortable with our 20% operating margin with the 40% incremental.

Okay, thanks for that color. And then, digging in a little bit deeper on the oscilloscope growth that you've seen in revenues and orders, I just wanted to hear what, from a secular level, is driving that growth? Because your competitors are entering the market, others are also in product cycles. What are the key drivers there?

One key driver clearly from a customer demand standpoint, these new bus standards, the new serial bus standards that are being used inside the computer, and to actually go ahead and move outside the computer are things that need to be tested and are being tested with our oscilloscopes. On top of that, last year we introduced the world's highest performance realtime analog bandwidth oscilloscopes with our GREX family of products. And although there have been some announcements that have been made since then, we still have the absolute highest signal integrity or the highest quality products on the market and that's why the demand is far greater than the supply we can produce at this point.

So, we're seeing explosive growth due to the take up of our brand new products, especially at the high end. And now, as we look at the lower end range and introducing those 26 new models today in Asia and tomorrow in the Americas, and Europe, you will see, I think, the low end continue to accelerate. And that's why I believe we will continue to take market share from the competition. And our market share we believe, right now, is at the highest level it's ever been in the Company for oscilloscopes.

Okay, thanks for that and then last question is around backlog again. What is the age of the backlog and what has been the trend of that age over the last couple quarters? Thanks.

We have very strict booking rules. We don't book anything over six months outside of long term service orders. And so again, very, very strict and that's why it's so imperative for us to continue to drive our revenue upward and that's why we readjust our guidance for the year.

Thank you.

The only exception to the rule is regarding the research products and the NMR where there are longer lead times between order to shipments and that's a new business for us. But otherwise, the rule is three to six -- six months maximum, so the backlog covers three to six months of future shipments.

Thank you.

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

Yes. Good afternoon and congratulations on a solid quarter.

Thank you, Ajit.

A couple of quick questions on the Electronic Measurement side. One of them is, the last cycle especially the late 90s, 2000 you had an extremely solid position in optical. Could you give us some color as to that side of the business, if it's material first of all as a part of your business right now and what kind of trends that you're seeing over there?

Sure. The optical portion is -- the optical part of our business is a much, much smaller part of our overall business than it was back at that period of time. It is doing -- we are seeing very nice growth. The sampling scope sub-segment, which is achieving over 90% growth right now, is seeing some rebound. But again, it's a small portion of the overall total of the Agilent business, that and a couple of other product categories. So, we are experiencing some benefit from it, but it's not a large portion of our results.

Got it. And then the second is, looking at the ROIC of your overall Electronic Measurement business, it's extremely impressive and very high but for a couple of quarters, it's now been the highest of any of your businesses. So, do we read that as this is a business that you don't want to be investing in, in the longer run? And how would you prioritize your investments in this area and also future M&A, whether you're still open to consolidating a position here?

Yes, first of all, you'll be very careful, being the 70 year old business, the amount of capital and capital structure that we have in place for EMG is quite a bit lower than on the LSCA side relationship to revenue and all of the goodwill that we had through the acquisition of Varian. So again, it's not an apples to oranges comparison. The investment that we're making at EMG in R&D is consistent with any of our top competitors that we have and we are, as you can see, investing to win. Ron, I'll have him again comment. We've talked about our oscilloscopes, we've talked about LTE, but I'm going to have in a moment, talk about what we're doing in network analyzers and in spectrum analyzers. But we are a leader in Electronic Measurement in every single one of our product portfolios and across the industry in absolute performance. So, Ron why don't you make a couple comments about the network analyzers and spectrum analyzers?

Sure. As Bill mentioned, we spend more dollars than anybody else in R&D and we spend at the same relative rate, relative to revenue as most of our competitors, but our growth is not only driven by a product category or two. We have introduced the world's highest performance network analyzer products, during the last years, the world's highest performance spectrum analyzer products and we have the world's highest signal sources. So, when you look at our core products and the core products, we grew 37% last quarter for all of them. And it makes up about 40% of EMG, so there's very, very strong success across the product line and that's why we can produce gross margins like this and operating margin of 20% in this area. But we are investing and investing to win, as Bill says, in all these main product category areas.

In terms of the acquisition area, we have been very, very clear our number one focus is in Life Science, analytical business. If there's an opportunity in Ron's space, in Electronic Measurement that we can make, that we can clear the regulatory environment, we would seriously consider that. But we have not deviated from our overall strategy to continue to invest in the analytical space led by Life Science.

Okay. And then the second question would be, just looking at the strength you have seen in the oscilloscope market, as well as some of your other businesses, on the Electronic Measurement side, how sustainable do you think it is? When you look at the funnel not just near term for these new products that you're seeing tremendous growth, but 70% to 90% order growth, 70% revenue growth for the overall oscilloscope category appears significantly higher than the long term growth rate that this industry has had.

As Didier said in his prepared comments that we come up to some tough compares and that we're looking at EMG for 2011 at a 12% organic growth rate, as it asymptotes out to what the market growth rate is going to be. And I think during the March Analyst call, we'll have a lot of discussion about that. We have a big debate about how strong the overall macro economy is going to be. I think 2011 will continue to be strong and that will carry over into 2012, is my own personal opinion. But the organic growth rates fundamentally are going to have to come back to some percentage points away from the overall market growth. The message, I think Ron has articulated very, very well, that we are in a very, very strong competitive position.

And on a sequential basis, you're not seeing any signs that the business is going to be slowing any time soon?

No.

Excellent. Okay, congratulations, again, and thank you so much.

Thank you.

Thank you.

Your next question comes from the line of Stephen Unger from Lazard Capital Markets. Please proceed.

Hi, thanks. Just a quick question on business that you guys don't necessarily talk about much in your prepared remarks, as far as service sales are concerned, could you talk about how strong they were as far as revenues in the quarter? And should we expect an acceleration in the service growth rate with a pull through from strong orders that you've had over the last year?

Absolutely. And again you've got to be careful. I'm talking about service and support different than our consumable business. As our revenue business grows, our ability to sell extended warranties -- there's a warranty period, right, for that year, but one would expect the service and support business to continue to grow. It's really quite a large part of our business, overall. The teams in each of the groups have done a superb job of improving our performance. We are highly competitive, have great customer satisfaction scores, but you're absolutely right, our service and support will trend upward with the increased sale of our instruments.

Great. So, then as far as the rest of the year is concerned, you should expect accelerating revenue growth there given that we've had accelerating revenue growth in product sales in the past twelve months?

Yes, but it won't be at the rate of the instrument box.

Got you.

Because, essentially depending on what the warranty is going to be, you get that, you might get some extended warranty up front, which will have an impact, but the delay, it's a little bit longer than one-to-one of what the order growths are coming in.

Got you. And then Didier, did you mention what the expected tax rate will be for fiscal 2011? Was there an update of that?

Yes, so 18% for fiscal year 2011. Last time we talked about 19% and we came down 1%, mostly on account of the extension of the R&D tax credit in the US.

Got you, and then, were you expecting that in fiscal 2012?

So 2012, we will have potentially two factors to take into account. Number one is a one percentage point reduction on account of the Varian integration being completed and our ability to bring Varian tax rate down to 11%, to the Agilent's level. On the other hand, we cannot predict if the R&D tax credit will be extended another year. So, if it is extended, then we'll come down from 18% to 17%. If it is not extended, we'll stay at 18%.

Got it. Thanks.

Sure.

Your next question comes from the line of Jonathan Palmer from CLSA. You may proceed.

If you could just break out for us, if you backed out in the quarter the Varian $30 million, what would Asia have grown on a constant currency basis?

Probably have the information -- hold on a second.

All of Asia organic revenue growth was 21% for the Company, so that's without any of Varian. It was 30% with Varian in Asia.

And then, the split of that $30 million in orders that didn't go through, was that US? Or should we think of it split geographically similar to Agilent's breakdown?

I don't know the answer. You can send an e-mail to Alicia, she can figure that out. But first order, I would just split it by our existing mix.

Great. I'll follow-up with Alicia.

Okay.

And then just one quick question for Didier, housekeeping here. In terms of the interest rate, what should we think about for the full year interest expense?

So, interest expense, I think -- hold on a second, I would assume $17 million per quarter of interest expense, net interest expense offset by $3 million of rental income. So, net-net other income and expense of $14 million negative expense.

Great. Thank you very much for taking my questions.

Sure.

At this time, I'm showing no further questions in queue. I'd like to turn the call back over to Ms. Alicia Rodriguez for any closing remarks.

Thank you, Derek. On behalf of the Agilent Management team and Executive team, I'd like to thank everybody for joining us today. If you have any questions, please give us a call at Investor Relations and have a good day. Thank you.

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