安捷倫 (A) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2013 Agilent Technologies, Incorporated earnings conference call. My name is Regina, and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. Later we will be conducting a question-and-answer session.

(Operator Instructions)

As a reminder, today's event is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Alicia Rodriguez, Vice President of Investor Relations. Please go ahead, Alicia.

Thank you, Regina, and welcome, everyone, to Agilent's first-quarter conference call for fiscal-year 2013. With me are Agilent's CEO, Bill Sullivan; as well as Senior Vice President and CFO, Didier Hirsch. Joining in the Q&A after Didier's comments will be Agilent's President and Chief Operating Officer, Ron Nersesian. Also joining are the Presidents of our Electronic Measurement Group, Chemical Analysis and Diagnostics and Genomic Groups, Guy Sene, Mike McMullen and Lars Holmkvist.

You can find the press release and information to supplement today's discussion on our website at www.investor. Agilent.com. While there, please click on the link for financial results, where you will find revenue breakouts, business segment results and historical financials for Agilent's operations. We will also post a copy of the prepared remarks following this call.

Bill and Didier's comments today will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. We will make forward-looking statements about the financial performance of the Company. These statements are subject to risks and uncertainties and are only valid as of today. The Company assumes no obligation to update them. Please look at the Company's recent SEC filings for a more complete picture of our risks and other factors.

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 7. Details about the meeting and webcast will be available on the Agilent investor website two weeks prior to that date. And now, I would like to turn the call over to Bill.

Thanks, Alicia, and hello, everyone. For Agilent's fiscal first quarter orders were $1.7 billion, up 5% year-over-year, inclusive of the benefits on the Dako acquisition. Revenue of $1.68 billion were up 3%, again with the benefit of the Dako acquisition, but in the low end of our guidance. Earnings per share of $0.63, were $0.02 below the low end of our guidance, due entirely to some unexpected one-time expenses.

The Company has struggled with the predictability of revenue and EPS performance over the past four quarters. While we have delivered EPS above the midpoint guidance in aggregate, we have missed our EPS guidance in two of the last four sequential quarters, and have exceeded EPS guidance in the other two quarters. The problem is the volatility of revenue and orders in the last month of the quarter.

Last year's third-quarter EPS shortfall was due to the unexpected push-out of deliveries. This quarter, we again experienced an unexpected last-minute push-out of deliveries, mostly in the communication market. In addition, while we were pleased with our strong January orders, over half of January's orders were received in the last five days of the month.

Our order fulfillment team did an outstanding job in meeting the low end of our revenue guidance, but we missed our internal revenue forecast by $35 million, which decreased our earnings per share by $0.05. With the lower revenue, we were not able to absorb the unexpected expenses. We ask for patience from our shareholders, as our customers continue to face challenging delivery needs. Agilent maintains a flexible delivery policy, and we are committed to be the best measurement partner for our customers as they meet their own business challenges.

Moving forward, we are widening our quarterly guidance range to set better expectations for our investors. We now anticipate likely cutbacks in defense spending, which accounts for about 10% of Agilent's business, and continued softness in the communications market. As a result, we are lowering our revenue guidance for the year, as well as our EPS range. We continue to control expenses well. We are driving down our variable spending as we reduce our flex force, and we are aggressively implementing our manufacturing consolidation plan.

As we continue to manage through end market and customer uncertainties, we are encouraged by the strong January orders, the breadth of new product launches, and the benefits of the expense reductions we expect to see for the remaining part of the year. Within the businesses, our newly-formed diagnostics and genomics group's revenue grew 145%, up 4% organically. The integration of Dako continues to proceed well.

We saw mid-single-digit year-over-year growth in pathology staining market, and high growth in expanding our pharma partnerships, as evidenced by the recently announced partnerships with Eli Lily and Pfizer. We are also pleased with our strong high single-digit sequential growth in revenue, as we continue to expand our sales team in Asia and launch new product.

For example, our HER2 IQFISH was approved by FDA. DataLink was upgraded as the market's leading software tool, linking all of Dako's instruments together for optimal lab control and workflow optimization, and the launch of our new automated stainer remains on track for commercial release. Our overall genomics business grew in low single digits, with a continued strength in CGH arrays for clinical market. SureFISH sales continue to see high renewal rate.

Our Life Science business grew 2% year over year. Academic and government markets were flat, with modest growth in pharma markets and mid single-digit sequential growth. We continue to see solid growth in our consumables and service business, and modest growth in our LC instrument platforms. While we saw a decrease in our LC/MS business due to difficult year-over-year compares, orders grew in the low double digits.

We also introduced several new products in the quarter to improve LC detection and increase workflow productivity. Chemical analysis revenues were down slightly year-over-year due entirely to decline in our environmental market. This is the second quarter in a row of weak environmental sales. The fundamental cause is lower government spending.

We continue to see strong growth in the forensics market, and flat to modest growth in food and petrochemical. At the beginning of February, we announced the introduction of our new 7890B Gas Chromatograph, and the 5977A Series Single Quad Mass Spec. These next-generation products offer industry-leading productivity, sensitivity, and reliability.

Electronic measurement revenues were down 7% over last year. This was mostly due to a decrease in the wireless handset market after a period of strong investment, but compounded by push-outs of delivery. Base station investment remains soft, as we await the roll-out of LTE in other major regions around the world.

Orders did strengthen in January, as we ended the quarter with a book-to-bill greater than 1. And even as we managed through the current market volatility, we continue to ensure that we have market-leading product. We introduced the InfiniiVision 4000 X Series oscilloscope, the only upgradable family of 5 in 1 oscilloscopes in the industry. And on February 8 we introduced the industry's highest-performing real-time spectrum analyzer for our PXA signal analyzers.

As a reminder, in January we announced the 20% increase in our quarterly dividend to $0.12 per share, as well as stock repurchase program up to $500 million during fiscal year 2013. These moves reflect our confidence in our ability to manage the present business volatility, our ability to generate cash, and our commitment to return capital to our shareholders. Thank you for being on the call. Now I will turn it over to Didier.

Thank you, Bill, and hello, everyone. As Bill stated, it has become more challenging to predict the short-term outcomes. 70% of our revenue is related to capital expenditures, where customers' buying decisions are heavily dependent on overall demand and business confidence, both at low levels in today's world of uncertainty. Because of customer delays in placing orders, shipments were also delayed. As a result, we achieved only the low end of our revenue guidance. However, we meet the low end of our EPS guidance by $0.02, due to unexpected and one-time items.

Three items made up most of the $0.02. They relate to customs duties in a [foreign] jurisdiction, unclaimed property claims in the US, and a balance sheet hedging loss. For a Company of our size and complexity, such items, both positive and negative are not unusual. However, this is the first time they were -- all were unfavorable. To recap the quarter, core orders were flat year over year, while core revenue decreased 2%, and our operating margin, always the lowest of the year in Q1, was slightly over 17%.

By segment, EMG core revenue decreased 7% year-over-year. CAG was up 1%, LSG, 3%, and DGG, 6%. By region, Americas was down 1%, Europe, 2%, Japan, 6%, and the rest of Asia-Pacific, 2%, all on the core revenue basis.

Now turning to cash, we generated $245 million in operating cash flow, by far the largest Q1 cash flow generation since Q1 of 2000. We bought back 2 million shares for $79 million, and are back to a net cash position of over $150 million. Now turning to the guidance for the full year, as Bill stated, the low end of our guidance now assumes sequestration will take place, while the high end reflects a slower economic recovery, lower government spending, and softer communication markets than previously assumed.

Also, currency is expected to have a negative revenue impact of about $35 million for the year, versus the November guidance. Fiscal year '13 revenue is expected to range from $6.9 billion to $7.1 billion, or 2% reported growth at midpoint, which translates into 1% core revenue decrease.

As you compare those projections with those of our peers, please note the different product and customer mix. We generally have a higher mix of instruments versus recurring revenues, and are more exposed to the industrial and defense markets, as well as to Japan. On an apple-to-apple basis, we are gaining ground in many of our businesses, but current results and short-term projections are skewed by our mix.

On the cost front, our global order fulfillment organization is on track to generate about $50 million of savings, and our control of discretionary expenses is nearly the same magnitude as during the 2009 downturn. Those actions, coupled with the benefit of the incremental stock buyback program, will partially offset the impact of lower revenue projections and currency headwinds on our EPS, which is expected to range from $2.70 to $3.00.

Finally, moving to the guidance for our second quarter, as Bill stated, we are widening our guidance range for the quarter, for both revenue and EPS. We expect Q2 revenue of $1.74 billion to $1.77 billion, and EPS of $0.64 to $0.70. With that, I will turn it over to Alicia for the Q&A.

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

Certainly.

(Operator Instructions)

Your first question today, folks, comes from the line of Jon Groberg with Macquarie.

Good afternoon. So obviously a lot of questions to go through here, so I will let others hop in. But I guess, very big picture on some of your last comments, Didier, around cost control. Can you maybe just -- given the fact that things seem to be a little bit slower, and I guess you are not anticipating them getting much better, even though some macro indicators actually suggest like things could get better in the second half. Can you maybe just walk us through exactly what you are doing on the cost side? And maybe why you are not being a little bit more aggressive?

Let me make that comment, Jon, if you don't mind for Didier, on the details. Fundamentally, I am actually more optimistic than I was last quarter. As you know, I have tended to be somewhat pessimistic. If you look at where some of our growth opportunities are, the introduction of our new products, there is actually signs that things are going to get better. So I believe that, not continuing to expand in the emerging markets, not continuing our R&D investments, not continuing our reach, is just a bad strategy moving forward right now.

As a result of that, Ron and Didier have put together a detailed plan of ensuring not only are we going to drive $40 million of manufacturing costs out -- and this is the first time we have announced the quantity of that -- that we are in the process of eliminating our temporary work force, managing all noncustomer, non-new product introductions. And if you go back to the 2009 downturn, which is quite severe, where we in fact, weren't making 17% operating profit, we are able to take substantial amount of money out of the system. So we are aggressively implementing that moving forward. Our guidance policy has been the same. At this point in time, the forecast for the rest of the year is $7.1 billion of revenue, and $3 a share. That is our outlook. But we are widening the downside, because of the continued volatility that we are seeing at, over that we have seen over the last four quarters.

Okay. So just maybe on those cost savings that you just announced, maybe just give us a little better sense of kind of how long it will take for, and when we will start to see those in the numbers? I mean, are those immediate to eliminating the temporary work force, I guess? But maybe some of the manufacturing costs out, and some of the other savings initiatives, when should those start to -- when should we start to see the full impact of those?

We will see the full impact of this as we go through quarter for quarter. And Jon, quite frankly, and for the other analysts, we have to stop the volatility of our announcement. We are going to take a broader range to set fair expectations moving forward. And we are going to do everything possible as a management team to ensure that we become more predictable in this slow growth environment moving forward. And so we have built into the $3 upper end range, the manufacturing cost reduction. And if we are successful getting more variable costs, that will become a hedge against any volatility in the top line.

Okay. And then if I can, just one more on just the guidance itself. I mean, it looks like your revenue outlook is slightly -- we are saying the midpoint before was flat, and now you are kind of minus -- minus 1%. And if I do the quick math to get to the $0.10 that you are talking about, I mean, it just seems like you are letting that flow through 100%. So is that -- am I missing anything else? Or are there any other things going on for that $0.10 that you are lowering the guidance for, for the year?

No.

Well, just the $100 million of lower revenue. That would translate into $0.14, just to be precise, so there is some offset to that. So that why we are only -- I mentioned those offsets in my script. And that is why we are reducing the EPS by $0.10 and not by $0.14.

Okay. I will let others hop in. Thanks.

Yes, sure.

Your next question is from the line of Jon Wood with Jefferies.

Hi, thanks a lot.

Hi, Jon.

Didier, did you mention how much buyback you have put into your numbers at this point for the rest of '13? And I would love to hear Bill's perspective, if anything has changed on the political front on the tax repatriation issue? I mean, do you see any resolution to that dynamic in 2013? Anything you are willing to offer there would be great.

Yes, I will answer the first question. So the forecast assumes we utilize all of the $500 million before the end of the fiscal year. And that we finish the year with 347 -- in the last quarter, 347 million shares versus the 352 million we had in the Q1.

And in terms of regards the likelihood of a change of tax policy this year, I remain skeptical -- that anything will be accomplished.

Okay. If you look at the remainder of the year, Bill, can you just talk about -- it seems like with the surge in orders in the last month the -- it just seems like you sound more positive, yet the numbers are coming down. Help us reconcile what incremental caution you have baked in from here? I guess it is not clear to me, if orders are improving, why you are not a little bit more bullish about the top line?

Well, as I said, I think that first of all, there is a likelihood of defense cutbacks. Again, we will know on March 1, as we have said. And there is evidence out there that the cell phone market after huge investment, may in fact be slowing down. And again, there have been some other independent articles written on that. So you couple those two, the outlook, and again, when we give guidance, it is very clear. The top line is what our forecast is, and then we decrement for there for the volatility. Unfortunately, we have been too narrow in this environment. And so as -- so if you combine the likely outhood in US defense spending, coupled with any sort of slowing in the communication market, that is why we took top line number of last quarter, $7.2 billion dollars and lowered it to $7.1 billion.

And the third factor I have mentioned, is that in the last three months, the yen has weakened 20% versus the dollar. And overall, the currency impact is a reduction in revenue for the whole year -- at present [actions] rate of about $35 million. So that is also a component of the $100 million. It is just pure currency.

That's a good point, though $65 million is business, $35 million is just the currency exchange.

Understood. Last thing, are you likely to know what form the defense cuts will take on March 1? What I mean by that is, are you just assuming a ubiquitous cut in your defense business? Or do you actually have clarity on specific programs that you are in that, that may -- that may receive funding reductions or the mix -- basically the mix of the cuts?

There was -- the preliminary work was done by Guy's team. And I don't know if Guy has any additional color. But right now, if you assume they muddle through with a moderate cut, the impact we believe would be 10% on our US defense. Worst case scenario would be 20%.

Thank you.

Obviously, they modeled that to the best they can.

Yes, and this is Guy. And I just second what Bill said, this is what we have modeled in, a 10% decrease.

But the low end of the guidance assumes a 20%.

Okay. Thank you.

Your next question is from the line of Amit Bhalla with Citi.

Bill, so I understand the -- that widening your guidance range will allow you to end up in ranges going forward. But I am curious what programs you are implementing internally to improve your order book visibility, and decrease the final week of the month loading that happens with the Company?

Well, besides praying, let me just share with you the situation. So we deal with 1,000's of customers every quarter. The top 25 customers purchased in Q1 $275 million. That is an average of $11 million a customer, 80% of the delivery changes came from these 25 customers. And again, Agilent historically has had very liberal -- very liberal delivery policies. Moving forward, we work with our customers, they have their own set of issues. And so you can see, and again, we had this quarter nailed on January 16, when I spoke to the Board of Directors.

And all of a sudden, someone says, hey, look, I can't take the delivery for X, Y or Z reason. And you are sort of stuck, and you can't invoice and so you can't recognize revenue. Even the late orders, our manufacturing team did a great job turning the orders, got them in the pipeline. But we just couldn't recognize revenue based on, as you know, a very tight revenue recognition rules. So I wish I could say something magical. I think it would be a bad mistake not to work with our customers. I mean, they have their own set of issues.

But in this environment, which is a slower growth environment, any change out of one of these big customers can become a surprise. And it has happened two out of the last four. And the flip side of it is, the other two quarters, we have been over guidance, as you know quite substantially. So I think as long as we are in a slower growth environment, around flat, we are going to have more volatility. The answer, of course, is to get back into our operating model of 4% operating -- the low end of our operating model of 4% organic growth rate. And I think that the signal noise ratio will just become lower. But I -- right now, unfortunately, there is not a magic answer right now, just given how concentrated the surprise has been in two of the last four quarters.

And good news, the good news is, these orders aren't getting canceled. I mean, this is not a 2001, 2009, where everything -- heck broke out and people are canceling orders. This is just strictly the issue of -- your assumptions at the end of the quarter. Didier said we are highly capitalized, capital equipment Company. A lot of the revenue goes out the last month of the quarter. And over years, it has been very predictable, the last four quarters has not, we have not done a good job of predicting.

And Bill, a follow-up on CAG, the softness in environmental. We haven't heard that. We kind of heard the opposite at some of the other companies. So can you tell me where globally some of the softness is coming from, and any other specifics you can give on the environmental side?

Bill, do you want me to take that?

Yes, I will do that. A couple comments. There have been at some companies that have mentioned this. And again, we sort of have an unique position in the environmental test lab. So, Mike, why don't you go ahead and respond to that?

Yes, sure, Bill. First, just as a reminder, I would say that Agilent probably has the strongest position in the environmental testing market with the breadth of our portfolio. So movements there are really amplified, in terms of our total results. But to the specific question, where we have seen it is, has been in the US marketplace, both at the federal and state and local level, as well as Europe. Japan also is weak. So the story is US, Europe and Japan. The emerging markets, Brazil, India, China continue to invest in these areas. But it is not enough to offset the challenge we have seen in some of our more mature geographies. I would say there is a bright note, if you will, that is emerging on the US side, which is the push to -- in the area of fracking, which actually is starting to increase the sample sizes coming into the private contract lab and the environmental side. But again, not enough to overwhelm the downside on the government's spending side. And again, I would just point out that we are particularly leveraged here, given our strength in this marketplace.

Thanks a lot.

Your next question is from the line of Ross Muken with ISI Group.

Yes, hi. This is Vijay in for Ross. Thanks for taking my question. My first one was in communications market, Bill. And I know that you sort of alluded to the fact that communications, I mean we might be peaking in the smartphone market, and that has been large part of the growth story here. Could you lay out sort of what the base case is for ration, what is the house view? What are you thinking on the cell phone market, and how are we to sort of look at the market on the two to three year time frame?

Go ahead, Guy. Why don't you give the latest perspective. Again, you have got to remember, we have an infrastructure, we have a leading position. We have the components and chipset, and then we got the handhelds. So, Guy, why don't you give an overview of what the latest thinking is?

Yes, your question was on the long-term. And clearly, on the long-term, we still believe that the overall smartphone growth is solid. And most specially all the data that the smartphones are using, among also all of the other devices, the mobile devices like tablets. So that's clearly the major growth engine for the industry. And then obviously for test and measurement solution, as we address not only the R&D and manufacturing for the devices, but as Bill was just mentioning, we have a very strong position in the infrastructure. And here, I must say that we started having more or at least better news. As you probably heard, the US operators are planning to add more CapEx infrastructure. There has been movement in China around the 4G allocation, at least for China Mobile. No firm date yet. And that is a little bit of the uncertainty that we have short-term. But the overall infrastructure market is something we should start seeing coming up later in the year. So that is really what I would add for now.

Got it. And maybe my next question for Didier. I know that Didier, you mentioned on the last call, a lot of folks have some restructuring. And sort of the way you laid out the case was, depending on the environment, and the environment at that time did not warrant for restructuring. And I guess, one quarter in, you are looking at sort of a fluctuation in order flows and volatility in some of the markets. We are also looking at maybe a potential sequestration, maybe a little bit of softening on the com side. What would sort of prompt you to take -- undertake more, I guess, significant restructuring activities and get the earnings up?

Okay. Now let me start answering, and then probably Bill will want to also say a word. The first thing is that it is not that we are not doing any restructuring. We are doing restructuring. It is very circumscribed, it is very well-defined, as we are reorganizing our manufacturing footprint, and really going after the cost synergies that we are already committed to on the Varian side, and the further cost synergies on the other front. So there is a lot of restructuring that is going on, but it is not growth-based and it is not indiscriminate. It is very well defined. And then for the rest, I think Bill already addressed the question. We do still -- we don't see any change for the secular growth rate of the Company, and we do see opportunities in the midterm, which means that we are not ready to do something that is more indiscriminate and similar to what we have seen in 2009. Bill, do you want to add to it?

I disagree. I think that given where we are now, putting the Company in some sort of oscillation, with taking out some of our core, given the opportunities we have, the products that we have in pipeline, to be able to move the EPS by a few cents, we know what to do. We have a great track record to make that happen. And right now, we are going to continue to invest, and continue to be a leader in the measurement market.

Thanks.

Thank you.

Your next question comes from the line of Dan Arias with UBS.

Yes, thanks very much for the question. I was just wondering if Mike or Nick could maybe break out the instrument declines or growth in the LSG and the CHG segments for -- versus consumables.

Yes, Mike, do you want to do that again? I apologize. Nick is overseas right now, He is not on this call. But Mike, if you could give a flavor, at least on the GCs and LCs and mass spec and.

Yes, yes, sure. I think the overall answer would be is, we have seen continued really solid growth both in our consumables business and services business. The growth, as Didier mentioned earlier are relative to the instruments and are tied to the capital expenditures of our customers, is actually more depressed, but with some bright spots in certain places, where we have got our spectrosity business growing. And I think Bill earlier in this call pointed to the growth in LC/MS and LC. I would say, on our gas phase business, which is the franchise business for the chemical analysis group. We continue to be challenged there a bit, given the weakness in the industrial segment, and the environmental market we talked about earlier. But actually down slightly, and the situation has stabilized. And I must say we're actually fairly optimistic moving forward because as of the 1 of February, we launched two major new products, which replace our franchise -- I mean, our flagship product in that core business. So the long and short of it is, the aftermarket of our servicing and consumables business continues to do quite well, growing faster right now than our instrument business. And then the -- as I said earlier, some parts of the portfolio are growing faster than others on the instrument side.

Okay. Appreciate that. And I realize that the competitive dynamic is pretty stiff in several of your markets. So I guess any thoughts on whether or not you think there is a share change dynamic that may be impacting growth anywhere in the business?

As Didier alluded to, we don't believe there is any substantive change in terms of share. Clearly, some of our markets where we are really strong, become weaker, and by defect, there is a shift. But in terms of anything fundamental, competitor to competitor, a specific market, we don't believe there is anything fundamentally that has changed.

Okay, thanks. And if I could just maybe sneak in a last one, your perspective on Europe at this point, just given the outlook that you gave, and last time around, that you do expectation is for not much in the way of improvement, but also not deterioration. Could you just sort of give us a way that you are looking at Europe?

Yes, I think Europe and the US, it is -- muddle forward. Last quarter we had before, we faced lots of issues in the US. As I said last quarter, the Europeans appeared to stabilize the situation, in the US is actually a little bit stabilized. And so overall, it's more positive. But I think that the opportunities in the US, Europe and Japan, it is going to be a tough environment. That is why we need to continue in invest in new products and continue to invest in emerging markets.

Got it. Thank you.

Your next question is from the line of Dan Brennan with Morgan Stanley.

Thanks. Thanks for the question. First, just on the sequestration, can you just quantify that $65 million operating revenue decline that you have built in there? How much of that dollar amount is due to the impact of sequestration?

Well, on the top line the, we -- there is $200 million delta between the high end and the low end of the range. And clearly, the low end incorporates sequestration scenario. On the high end, it is not a full sequester. It is really tight budget spending, but not a complete sequester of the sort that we have baked into the low end of the range. So it's not -- sequestration is not the scenario for the high end, or at least the (inaudible) sequester is not the scenario for the high end of the range.

And again, is that model -- is that 10% of our business is with Department of Defense. And -- or excuse me, in the defense market, of which 65% is US only. So that is the range of the exposure that we have.

Okay. And then maybe -- thanks for that. Maybe on the communications segment, could you just drill a little deeper, like specifically you have called out handset weakness, you have called out base station weakness. Was it -- can you give us a little color? Was it a particular -- one large vendor that you basically -- I know second quarter you have a tougher comp from that production order that you captured last year. But maybe a little more color just on what is going on in the handset market? Is it a pause ahead of maybe some of the impact of the build out of some of these systems, that we are going to see an uptick? Or -- I guess when we look, listen to some of the competitors, while things aren't good, at least they seem to be signaling things are pointing in the right direction now. So I am just trying to figure out what is going on there?

Right now in Q1, we said we expected the business to roll off, because of the investment leading into the new year. So -- and I think that has been universal across the market. So we knew that the Q1s, particularly our Q1, is going to be lighter moving forward. Then the guess is, what is going to happen? Real easy to say everything is going to be great. There are lots of external articles as Guy alluded to, that are suggesting that the growth of smartphones, even though it is the hottest part of the market, may in fact be slowing. The total cell phone market growth for the year is only targeted at 1%.

And so, again, we are conservative Company, laying out exactly what we see. The other guys are right. We will do better. But right now, we don't hope for things. We just try to look at the best data that we have available to us, of what is going to happen. Again, we've been doing cell phone tests for over 10 years. And before that under HPI, used to run the RF microwave group inside Hewlett Packard [buying] components. This stuff is highly volatile in, as people build up for capacity. And then, of course, utilize that capacity as the markets slow down. And, of course, there is huge changes from vendor to vendor, and who wins, which also has a second order effect on investment.

And then maybe one final just related to it, Bill, thanks. But so does that portend any real change in the way you are operating your com business? I mean it sounds kind of negative, if the smartphone market is really kind of slowing, is there a point going forward, an earlier question alluded to -- I think Guy mentioned China -- we have 4G licenses (inaudible). So I am just trying to figure out how long could this pause in this smartphone market occur, and kind of what are you doing internally to deal with it? Thanks.

I will have Guy respond to that.

Well, I would say, I wouldn't see it as a pause first. It is ongoing investment happening. And as you know most of the overall manufacturing investment that are aligned with the new product introductions are -- is usually happening more in Q2, Q3 phase. So I wouldn't say there is a pause. But in the same time, the fact that some of the smartphones are really aligned with two major companies, it has -- it has an efficiency play in the manufacturing that we have to take into account when we forecast our business with them. The wild card is to see if the other companies, the Chinese companies and some smaller player, and understand when they will come up with some of the devices around LTE, for instance. And that is still in the cards, and we have not seen it yet. But obviously, it will happen at one moment.

Okay. Thank you.

Your next question is from the line of Isaac Ro with Goldman Sachs.

Yes, good afternoon. Thanks for taking the question. Didier, I just want to get back to an earlier point on just sort of forecasting, and the visibility in the quarter, and what you are going to do to work on that? Will you be able to share some of the specific actions that you are taking to improve your forecasting methods? Because it does seem to me that widening the guidance range is helpful, but not necessarily something that is specifically addressed the key issues there, when it comes to forecasting going forward?

Yes, Bill addressed that in saying that a lot of the issues just come from customers that we -- and we absolutely determine to give them the flexibility that they need in order to operate in a very volatile environment for them, too. So it is not so much -- look at it as a customer satisfaction kind of issue also, that we are not going to fight the customers. If they want to have a little bit more flexibility -- at last minute to, to serve their need. I don't know, Bill?

I can't say it any clearer than that, $20 million of revenues, $0.03 a share. And we are not going to change our policy towards our customers in working with them on delivery. A lot of these deliveries, they have installations and all the rest. We are in a slower growth environment. You know the pluses and minuses. That's how people run their business. We are shipping capital equipment. And it is just very easy to have a -- for example, a $20 million change at the last minute, and that's $0.03. And there is just no way you can recover at the end of the quarter.

And so that' is where we are. Yes, do we do a better job of second-guessing our customers? Sure. But the net result is that you end up lowering your guidance, right? And -- because you are surely not going to bet on anybody accelerating receipt in this environment, unless the economy turns around. And so you are just in a big catch 22. And we are just being as transparent as we can. And again, hopefully given the actions that we are taking to minimize on the downside. And again, continue to focus on increasing our organic growth rate, that the volatility that we have seen in the last four quarters will dissipate in time.

Okay, and then just to be -- that's helpful. Thank you. Maybe just to follow up on the comment on the $20 million and $0.03. Just to be clear, that entirely is tied to timing of orders, not -- and to be specific, not tied to anything related to market share? I think there was a question asked earlier about sort of how you map out versus your competitors. Just trying to be clear that there wasn't anything in the quarter, in your opinion that had to do with market share or large contracts switching hands?

Again, all that happened was, and again, as I said, on January 16, we were highly confident that we were going to have another $0.05 of EPS. Highly confident. End of the quarter, someone calls up, hey, sorry, can you delay this thing a week, and the delivery a week? And that's it. You are done.

Secondly, with the late orders, the team did a great job of actually turning the orders. Get them out the door, but you can't, you can't recognize the revenue because you haven't gotten the invoice. And it is as simple as that. I mean, we are incredibly disappointed. And the team did a great job in the last week, trying to scramble around. But, I mean, unfortunately things happen. In the course of history, in the last four quarters, that $35 million rolls into Q2, right? $0.05 rolls into Q2. So again, if you look at the last four-quarters' aggregate, we have been above the midpoint and have executed fine. Unfortunately right now, we are seeing the highest volatility, quite frankly, that I have seen since we created Agilent, outside of the 2001, 2009 downturn.

Got it. Appreciate that. Thanks.

Your next question is from the line of Paul Knight with CLSA.

Hi. This is Bryan Kipp on behalf of Paul. You alluded to some cost synergies that are still going on at Varian. Can you just jump into that a little bit further? Are you still seeing margin improvement or benefits from the Varian acquisition?

Absolutely. Bill mentioned, that -- or I did also in my script, that we are going to deliver $50 million of incremental cost synergies, and Varian is a chunk of that. I would say about 0.50 of that is on the Varian, and we have another year to go before we accomplish our goal, in terms of delivering $100 million of cost synergies for Varian. And the rest -- our other cost synergies that the -- will be delivered by the new Agilent order fulfillment organization, and which will cover both logistics, manufacturing, rationalization, and material savings.

Thank you. And just one more follow-up. You mentioned some head winds on the currency side in Asia, specifically in Japan. But how is that region helping or hurting total margins?

Well, the region -- you mean from a currency standpoint?

Sorry, not on the currency standpoint. Just on top line, working through for expenses?

Well, in general -- well, certainly in general, our margins, our prices are about the same, in whatever regions where we operate. So you could say the margins on the regions where operating expenses might be small -- is -- are lower, is better on the operating margins level, if that answers your question. I am not sure exactly if that addresses your question or not. What -- ?

Yes, I guess just are your margins in your Asia-Pacific region, are they above the Company average, the 17%, slightly north of 17% this quarter? Are you seeing some head winds there, or just -- ?

Gross margins are about the same. And usually, as you can imagine, the (inaudible) costs are lower in some of those regions than they are in the high cost jurisdictions. And Ron would like to add --

The biggest issue that affects our margins is our mix. So when we look at some of the products that are sent to China for manufacturing, that has a different margin structure than some other projects -- other products. But for the exact same product, our margins hold up very well.

Thank you.

Your next question is from the line of Tycho Peterson with JPMorgan.

Hi, thanks for taking the question. Did you ever, Bill, say what was embedded in guidance for growth in the core business? I know previously, you had said minus 1.5% to 1.5%. Can you just be clear on what's embedded for core growth?

I will let Didier do it. I think it is roughly the same.

So by business, if I look at the high end of the guidance, where the core growth is about flat for Agilent, it will be 4% to 5% reduction in the EMG, 3% -- 3% to 4% increase in CAG, 4% to 5% increase in LSG and DGG. And again, we are talking organic growth. And currency adjusted, DGG would be up 10%. So that's -- with all things, that gets us to 0%, which corresponds to the high end of our guidance at $7.1 billion, on the currency adjusted and organic basis.

And then are you able to comment at all on that China book-to-bill? And just kind of latest trends there? I know you talked qualitatively about it a minute ago but?

Well, the China business, again, clearly compounded with the -- the projected slowdown in communications, plus the push-out of deliveries. Overall, China was relatively flat, just because of the result of that. The chemical analysis business essentially was in the very low single-digits. The Life Science business though, had a substantial growth in the quarter, exceeding 20%.

Okay. And then are you able to talk on pricing? I know you had a couple comments on competitive dynamics earlier. But can you talk about whether pricing trends may have impacted margins?

We had said that, at the beginning of the year that we had -- we were going to target our manufacturing cost savings to offset pricing. This quarter, Didier did say the number, that we thought we could get $40 million of gross margins out and actually make a contribution. So to date, even though there is obviously [point] deals where there is margin pressure, the fundamental discounts have not -- have gotten a little bit weaker, but have not changed substantially.

And I guess on that margin comment, margins are always back-end loaded in the year, but if we look at the guidance you laid out, I mean you need to average I think about $0.77 in the back half of the year to hit guidance, off of $0.67 next quarter. That is a little bit of a bigger step-up than we have seen before. And is that just a function of the additional cost workouts?

Actually, the slope isn't that much different than '12, given how we started off so slowly in Q1. It's actually -- the seasonality is not that different than '12.

Yes. Part of it is top line, it is operating leverage. Because we are seeing what the -- hearing what you are hearing also, which is that the economy would slowly grow again. And so that is embedded in our guidance, and part of it is just the cost synergies. But the cost synergies I would say, are fairly well balanced throughout the remainder of the year.

And last one, if the communications market is really kind of slowing here, has this changed the secular growth rate of the Company across the cycle?

Don't read anything more than what we said. Q1 was slower as anticipated. Given the volatility that we have and the push-outs, we are saying that we are planning for the potential for slower communication. That's it. And it's one view of many. You will have some people saying it's going to be up on the right forever. Some people will say, hey, it is going to be a slowing down, because of the investments at this point of time. All we are saying is, is that is what our plan is built into our guidance. And that is our view at this point in time. And if we are wrong, we will capitalize on the upside. And if in fact it's worse than that, then we will make the corresponding adjustments.

Okay. Thank you. That's helpful.

Sure.

Your next question is from the line of Derik De Bruin with Bank of America.

Hi, good afternoon. Can you just talk a little bit -- the genomics and diagnostics business was up 6% on the core growth, a bit number -- a little bit number bigger than what we were thinking for. It is like what is sort of driving that? And can you also give us like an update on Dako, and where you starting the product portfolio launch? And how you have seen -- are you getting -- what sort of traction you are getting right now from sureFISH?

I will -- I am going to turn this over to Lars in a second. But I could not be more pleased the progress that we have been making with Dako, in terms of the integration into a large company without distracting them. And again, hopefully Lars can validate that, or verify that. Secondly, as you know, Lars has taken over responsibility for all of our Genomics businesses, as well as our pathology business to really drive leverage. And the -- that integration on top of that is going well. So Lars, why don't you go ahead and talk a little bit about how you see your core Dako business, and the opportunity in the new group? (Inaudible).

Sure. I basically agree with that. It's been a great journey so far coming into the Agilent family, and we are allowed to do the right things here, which I think is very important. I think we are holding the line with Dako pretty nicely here. So if you look back the last couple of quarters, we have been able to stabilize our business at the core pathology level at around 5% organic growth rate. And relative to the market, Dako is doing better. But it's fair to say still that we are not yet up to the speed of the market. We hope that that traction will change in the course of the next, probably two quarters as we will be moving in an unprecedented number of new products that is right now hitting. That is anything from new chemistries to new instrumentation. So basically we are going to go to market in the next few months with a very broad and diverse portfolio.

And more specifically, what we believe is going to drive the uptick here on the core Dako business is fundamentally, is a new fully automated instrument. And I have said before that we foresee alone somewhere midst of 2013. And to characterize that even further, I can say that we are into customer [sites] right now. And we have now -- around a fairly significant number of both immunohistochemistry in these slides, and the results so far as measured by group of pathologists is really spectacular. We haven't released the spec on what we are going to come with at this point in time. We will be doing so in the course of the next four weeks. But the internal benchmarking that we have indicated that this is going to be a very high performing instrument. So stay tuned. There is going to be more information coming out of that.

We will be expanding our clinical sites towards the -- call it the second calendar quarter of the year. And I expect us to be into full swing launch somewhere in the third calendar quarter. So we see this as a terrific upside to build on the strength that we have been able to stabilize with the Dako business. So things are looking good. To break it down per geography, if we look at our core Dako performance, we are probably growing, the last quarter in the North American or the US -- the Americas business by around 6%. We are pretty flat in Europe, and the Asia-Pacific business inclusive of Japan is up around 15%. To breakout the few of the things where we see, main attraction would be China, where we are growing more than 100% as an example. So things are picking up, and we are able to leverage the infrastructure from Agilent, and also the incremental investments in field resources that we have put in place.

In terms of the, the genomic basis, I am pleased to say we have been able to substantially improve the profitability of the business during the last 12 months. The team has done a great job, actually reducing costs, and actually improving the margins there. We see a good traction with the CDH microarray business getting into the clinic, and we expect that that penetration will continue, and we are going to benefit from that. That is a very important line for us. So the number of the other consumables and instrumentation are doing very well, and we are pleased to see the progress. And compared to the industry benchmark, I am pleased to say that we are at the level where the industry has been performing the last two quarters.

Specifically around the sureFISH, we are having a customer base of, I would characterized that at around [150] to 170 customers to date actively reordering. The reordering rate is not at the level where I would be pleased right now. So we have made a footprint. But we haven't penetrated to the ability -- of the potential of the Company right now. A few things that we are finding out is the time to validate the new probes, get into the accounts takes a bit longer time, and we also need to ensure that we optimize the sureFISH on FFPE on the tissue. And we are going to automate that on top of it.

So there are three things that is going to happen here in the next few months. We are going to have more probes out, addressing some of the solid tumors. We are going to optimize it on tissue, so it can be carried by the Dako sales force. And we are also going to automate that on the new instrument that is going to hit in the next, call it couple of months here. So we are making good progress. We are gaining incremental business, competitive wins obviously, but not yet up to the potential. And I promise you that is going to be a very important area, and a significant growth opportunity for us.

Great. Thanks for the detailed answer. I will get back in the queue. I have another question for follow-up.

Your next question is from the line of Doug Schenkel with Cowen and Company.

Good afternoon. Can you walk us through the components of the revenue guidance reduction? You missed the midpoint of revenue guidance by $10 million. You said you would have been -- I think $10 million to $20 million higher, if it weren't for the delays. Recognizing FX has become less of a head wind, you obviously lowered full-year revenue guidance by a lot more, $100 million I believe at the midpoint. How much of this is defense? How much of it is communications, and how much of this is largely other things? Or maybe just giving yourself a little bit more wiggle room, given the choppy execution over the last several quarters?

$100 million for the year, from $7.2 billion to $7.1 billion. $35 million currency. And just split the difference on defense versus communication moving forward. And I think that your comment of trying not to have another quarter like this is legitimate.

Okay. And I guess I am a little -- it is a little surprising at least to me that a key component you are highlighting of having to reduce your revenue guidance is attributable to sequestration, given I think you would agree how pessimistic you have been regarding developments or lack thereof in Washington?

Yes.

What exactly were you expecting before for defense, and how did defense hold up in January? We have seen some data, such as the fact that DOD contract awards declined I think 42% year-over-year in the month. So that wasn't something that you called out as being an incremental headwind in the quarter. I am just wondering if you saw anything over the last few weeks?

Well, it is interesting. I will have Guy talk about the US. Our defense business in the quarter was actually up 9%, all driven by non-US purchases. But I will have -- so again, anomaly now, but the -- I will have Guy comment about exactly what they are seeing between the government and the prime.

Well, yes, as you heard from Bill, our business really grew because of the international part. In the US, we were flat in Q1. And mostly because of the backlog we got in Q4 in orders, and also the year-end money, the budget spending for, for most of the defense and contracted. So flat in the US, and growth comes from outside of the US, with a number of very interesting programs. Russia, for instance, was very strong, but also China in this regard. Going forward, I would say that the one thing that I would just add to the sequestration is the overall continuing resolution that is set up. And that has a -- in fact more interesting lever, as we really would expect that the government kept to an agreed upon budget. As soon as the budget is set up, this will allow then everybody to start investing and making plans going forward. So it is mostly the fact that nobody knows what is happening, rather than the decision of yes or no for sequestration are we looking for final decision.

But if you see award activity actually slowing down, recognizing that that would not have translated into immediate revenue anyway. But if you are seeing award revenue -- I am sorry, award activity slow down recently, wouldn't that suggest that if there is going to be anything that is in line with the dynamic you just described, moving past the continuing resolution and having some certainty that it is going to take a little while for that revenue to flow through?

Well, that is the big question, it's going to take a while, and we just don't know how long. So far, what we have in the guidance is -- we assume there is going to be a budget, and that we are -- in the high end of our guidance, that we will see some orders coming in mostly versus the end of the year.

Okay. And last question, could you just talk about the impact of lunar new year being a little bit later than it was last year, how did that play into, play out in January and how is that being reflected in Q2 guidance? Thank you.

We are -- lunar new year, again, because of our quarter from October to January, every four years Lunar new year is in the same as Christmas holidays, which is always a problem for us. Because the lunar new year this year, in fact is going on right now, at the very beginning of the quarter, there is -- we don't imagine any material impact the lunar new year to Q2 whatsoever.

Thank you.

Your next question is from the line of Timothy Evans with Wells Fargo Securities.

Hi, thanks. Could you comment a little bit more on more the general purpose end market? And just what is your outlook there, given that we are seeing some improving macro variables, and maybe also just what do your customers tell you when they decide to push out an order? Is this just based on, we need to make our own numbers, or is there something else going on there?

Well, again, we can't make a comment on push-out of orders. As I alluded to it, we have huge customers and -- which I think adds more volatility. Even though we have 1,000's and 1,000's of small, $10,000, $50,000 customers, the top 25 customers average $11 million a quarter. So it doesn't take much at the end. And there are just a variety of reasons why they want something later or not. So I will just leave it at that. And again, we never comment on any individual customer. But, Guy, why don't you go ahead and give an update on what you are seeing, in terms of the overall general purpose market, and can you put a plug in the continued success of oscilloscopes?

Yes, maybe I should start with this. Our oscilloscope program keeps hitting very well, our expectations and had another positive [growth] this quarter, and very pleased with this, probably give you more details when we meet in March at our meeting there. The general purpose market is, I would say really mixed, besides the high speed digital discussion that I just shared with you on the oscilloscope side, the rest of the market the cost of the world was down, as you have seen our industrials for EMG were 13% down. And it is based on the macroeconomic concerns still. The PMI is a little bit better than last quarter. But the trend is still too slow for people ready to invest, until, unless they have clear production needs. And this obviously, is not really clear in the marketplace yet.

Great. Thank you.

Your next question is from the line of Mark Douglass with Longbow Research.

Hi, good afternoon.

Hi.

Hello.

Well, a lot of my questions have already been asked and answered. But Bill, you talked about order of visibility has been very problematic. Is it pretty much confined to EM, or have you also seen more volatile order patterns in the Life Science and chemical businesses as well?

The -- it's still predominantly EM, given how big it is, and just the size of the customers are so large. But this quarter, we also -- and again, Mike can comment -- we actually saw some unusual push-outs, delays in the -- in the chemical analysis side as well. And so that's new. But it is still predominantly the electronic measurement part of the business. I don't know, Mike, any comments about -- (Multiple Speakers) -- a little bit of it, too.

Yes, there was actually a silver lining in that story. So, Bill is exactly right, that we saw some unexpected volatility in the end of our quarter. As Bill said, we thought we had it nailed on January 16 when we talked with the Board. But the good news, the silver lining is, what we saw is a lot of interest in our new launch of our franchise products. And so what we saw at the end of the quarter was a number of our customers asked us to convert their orders, and they were interested in the new products. So that was not part -- occurred at a higher level than we anticipated. And that is why I said earlier, there is a silver lining there. So that is what we saw at the end of the quarter from the chemical analysis side.

And the new products were all GCs? Can you explain -- ?

Yes, these are our two highest volume gas-based products. It is a replacement for our 7090 gas chromatograph, and then also our single-quad DC mass spec product.

Okay. And then final question, just to confirm, so looks like you are still expecting flat to low, or maybe mid single-digit growth in chemical Life Sciences for the year?

Correct.

Okay. Thank you all.

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

Just one quick question. Didier, when you look at the decremental margin in the EMG business, whether you look at it year-over-year, or you look at it sequentially fourth to first, is there any mix impact in that decremental? Is that all volume? And should we kind of expect that going forward, or is there again, some of the cost takeout that you alluded to, is it weighted towards EMG?

Well, EMG has since Q1 of 2012 engaged in very strict hiring freeze and cost controls and things like that. So they are in the process of accelerating those -- this clamp down on expenses. But the really all of the -- I mean, that helps, but the impact of the loss of operating leverage, the impact of lower revenue is really what explains all of the decremental. It is all top line, because they have done a really good job at managing their expenses. They have really achieved the goals we had set for them, in terms of again, incremental, decremental. And in the old days we would not have seen EMG at that kind of revenue, at over 17% operating margin. So it is certainly -- and they are in the process of doing more in terms of discretionary expenses. But as you know, they have the highest gross margins in the company and so they are --.

Yes, Okay. And Didier, could you also -- I am sorry, you whipped through this a little fast. But could you just repeat, did you suggest the EMG business now for the year, with sequestration at the midpoint in the estimate, and then also with the com slowdown, did you suggest maybe down mid single-digits is a better -- ?

Yes, but that was in line with the high end of our guidance of $7.1 billion. That EMG core revenue growth, currency adjusted, would be between minus 4% and minus 5%.

Okay. All right. Great. Thank you.

Sure.

Your final question is a follow-up question from the line of Derik deBruin with Bank of America.

Hi. I just wanted a little bit more clarity on something. So I am a -- as a molecular biologists and Life Science analyst, I am certainly -- a little more familiar with the other side of the business, the EM business. I appreciate some of the comments you have made on -- not thinking that you are seeing share shifts in this business. But I am just curious, it is like what other -- what other evidence out there -- how can we gain better confidence that you aren't seeing some pressure, particularly in areas like the wireless testing business, particularly since some of your competitors like LitePoint are now part of Teradyne? I am looking for some better quality metrics, in terms of the market share shifts in this area. What could we do to get a better comfort level that is just slow down in market and not share loss?

It's very difficult, because the biggest competitor we have is Rohde & Schwarz, and it's a German company and it's private. The battle right now for the wireless handset market in R&D is between Anritsu, Rohde & Schwarz and ourselves. That is by far the biggest players. And Anritsu, of course, had a great run last year, and you can look at their numbers for last quarter where they have slowed down. But that's the ball game. The biggest issue is one of the largest competitors in this space is private. You can clearly get their tax returns, when they file backward-looking, but that is really where the battle is. And it is no disrespect to some of the smaller companies that are playing in this space, but the communication market is $4 billon or $5 billion. You know how big we are, and that is really where the action is. And our biggest competitor, point for point, is Rohde & Schwartz.

Thanks for the clarity. Appreciate it.

Ladies and gentlemen, this does conclude the question and answer portion of today's broadcast. I would like to turn the call back over to management for any closing remarks they would like to make.

Yes, thank you, Regina. This is Alicia. I just wanted to thank everybody for joining us today on the call. And we look forward to seeing you at our Analyst Day on the 7 of March. Thank you.

With that, ladies and gentlemen, we will go ahead and close out. Thank you so much for your participation today. This concludes our presentation, and you may now disconnect. Have a great day.