安捷倫 (A) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Third Quarter 2013 Agilent Technologies Earnings Conference Call. My name is Philip, and I'll be your operator for today. At this time, all participants are now in listen-only mode. Later, we will conduct 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 your host for today, Ms. Alicia Rodriguez, Vice President of Investor Relations. Please proceed.

Thank you, Philip, and welcome everyone to Agilent's Third 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, Chemical Analysis, Life Sciences, and Diagnostics and Genomics groups -- Guy Sene, Mike McMullen, Nick Roelofs, 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 under the Financial Information tab. There you will find an investor presentation, along with revenue break-outs, 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. Now I'd like to turn the call over to Bill.

Thanks Alicia, and hello everyone. Today, Agilent reported third-quarter revenues of $1.65 billion, a decline of 4% year over year, including the Dako acquisition. Adjusted net income was $233 million, or $0.68 per share. We exceeded EPS guidance, despite continued challenges in many of our markets, and the economic environment in general. Agilent's strong three earnings reflect our ongoing commitment to actively manage costs and expenses in response to macroeconomic uncertainty. Consistent with the commitment we made in the second quarter, we successfully decreased operating expenses sequentially, and we continue to benefit from our focus on reducing manufacturing costs.

Before turning to the business highlights, I want to remind you with the acquisition of Dako, we will no longer refer to our Life Science and Chemical Analysis businesses as bioanalytical measurement, or BAM. Instead we will focus on LDA, for Life Science, Diagnostics, and Applied Markets. As I mentioned last quarter, this is not an organizational change. We will continue to report Life Science, Diagnostics and Genomics, and Chemical Analysis as separate segments.

LDA revenues in Q3 were $951 million, up 8% year over year, including Dako. LDA's operating margin was 18%. In LDA markets, we saw good growth in pharmaceutical, up 7% on technology upgrades. Food and energy also had solid growth, up 11% and 6%, respectively, on strong demand from China. Clinical and Diagnostics grew 114% including Dako, and 16% organically, on good demand for our Array CGH and target-enrichment solutions. The continued out-performance of these segments was slightly offset by expected year over year declines in environmental and forensics, and in academic and government, down 11% and 7%, respectively -- both declines a result of the ongoing sequestration in the United States.

Our focus on emerging markets continues to pay off. BRIC-country revenues were up double digits across almost all of LDA, with China growing more than 20% versus a year ago. Within LDA, Life Science grew revenues grew 3%, led by consumables, services, support, and informatics. Operating margins continued to improve, approaching 17% for the quarter. LSG announced several new products in Q3. Two highlights were the 1290 Infinity 2D-LC solution, and our new StreamSelect LC/MS system. 2DLC provides superior resolution compared to any other LC-based separation approaches. StreamSelect dramatically increases mass spec productivity for our customers.

Revenues in our Diagnostics and Genomics group grew 54%, or 6% on an organic basis. Operating margins were 15%. In Genomics, we saw strength in CGH, and good demand for our HaloPlex and SureSelect products. Demand for Dako products approached market growth, which has slowed to low- to mid-single digits due to softness in Europe and the US. We expect the commercial launch of Dako's new Omnis autostainer in Q4 to accelerate our growth. Omnis feedback from our early customer sites has been excellent. Our expansion of SureFISH into the Dako channel is on track, and is expected to gain momentum in FY '14.

In the Chemical Analysis Group, revenues were up 1% year over year. Operating margins were 22%. GC sales, notably from China, and re-occurring revenue growth led CAG's results. We saw the beginning of improved replacement market demand, as orders increased over our new GC and GC mass-spec products. A number of new product launches are planned over the next 12 months. Looking forward, we expect mid-single-digit growth in Q4 across LDA, as new products gain traction, and markets that are less impacted by sequestration continue on a positive trend.

Turning to the Electronic Measurement Group, revenues declined 17% as projected, to $701 million. Operating margins at 18% reflected excellent gross margin management and tight expense controls, in response to globally challenging market conditions. Communications revenues were down more than 30%, as expected. This was primarily due to the non-recurrence of a wireless customer deal discussed in last quarterly earnings call.

Industrial computer and semiconductor revenues declined 11%. Global economies remain weak, while lower PC volumes and fewer technology roll-overs required less capital capacity. Aerospace and defense revenue grew 1%, with strength in our non-US defense business. Despite challenges in EMG's markets, our investments in transformational initiatives continue to pay off. Module, AXIe, and PXI platforms saw another quarter of double-digit growth, while hand-held instrumentation continued to perform well.

The underlying secular growth drivers in mobility and computing remain strong. As a result, we continue to invest in industry-leading test solutions. We are on track to launch several new products for wireless R&D and wireless manufacturing in the coming months. Looking ahead, we expect the uncertainty electronic measurement macroeconomic environment to continue into Q4, with continued softness in communications, industrial semi, and computer markets. As a result, we are forecasting EMG revenue to decline by low teens in Q4.

Last quarter, we announced that Agilent's Board of Directors doubled our authorization under the current stock repurchase program. This brought our total authorization to $1 billion, inclusive of the amounts repurchased since November 1, 2012. Agilent repurchased 5.3 million shares of common stock in the first half of 2013, and repurchased an additional 15 million shares during the third quarter. We have now utilized $900 million of our total authorization. We expect the program to be completed by the end of calendar year 2013.

Overall, we believe we are exercising the right strategy to create long-term value for Agilent shareholders in this environment. We are ensuring that we protect Agilent's profitability, while capitalizing on opportunities for the future. We continue to invest in high-growth opportunities, including communications, Life Science, Diagnostics, and Applied and Emerging Markets. Our commitment to innovation, R&D, and excellent customer satisfaction remains strong. We have a deep pipeline of new product introductions that will enable us to differentiate and win in our targeted markets.

Moving forward, we're focusing our R&D efforts on high-growth segments that will drive meaningful revenue growth for the long term. For the fourth fiscal quarter, we expect Agilent revenues of $1.7 to $1.72 billion. Non-GAAP earnings per share will be in the range of $0.75 to $0.77. Thank you for being on the call. Now we'll turn it over to Didier, to a more-detailed discussion of our financial results.

Thank you Bill, and hello everyone. To recap the quarter, Q3 revenues adjusted for $10 million of currency headwinds, was slightly above the high end of our guidance, and EPS was $0.04 above the high end of our guidance, as we continued to drive higher efficiency in manufacturing and SG&A, as well as enforce strict expense controls.

Core orders, which exclude the impact of currency and acquisitions, were down 5% year over year, while core revenues decreased 6%. Core orders at EMG were down 15% year over year, or down 8% excluding the non-recurring wireless manufacturing test deal of a key account discussed at last quarter's conference call, while LDA core orders were up 4%. Within LDA, LSG core orders were up 2%, CAGs up 6%, and DGGs up 6%. Core revenues at EMG were down 16% year over year, or down 7% excluding the key accounts wireless manufacturing test deal, while LDA core revenues were up 4%. Within LDA, LSG core revenues were 4%, CAGs up 3%, and DGGs up 7%.

By region, core revenues were down in the Americas by 17% and Europe by 3%, but were up in Japan by 9%, and the rest of Asia-Pacific by 3%. LDA core revenues grew in all regions, where EMGs were down in all except Japan. To note, LDA revenues in China were up 21%, after 16% growth in Q1 and 14% growth in Q2. Both EMG and LDA delivered a strong operating margin of over 18%, with more potential for margin expansion, and increasing operating leverage as the economy picks up steam.

Regarding cash, we generated $215 million in operating cash flow. We issued debt of $600 million during the quarter, and paid off $250 million notes maturing that quarter. We also spent $681 million on share repurchases. At the end of the quarter, we had a net debt position of $315 million.

Now turning to the guidance for our fourth quarter. The mid-point of our revenue guidance at $1.71 billion corresponds to year-over-year decline of 1% on a core basis -- made up of a decline of 11% for EMG and a growth of 7% for LDA -- including CAG at 6%, LSG at 6% and DDG at 12%, all on a core basis. The mid-point of our EPS guidance at $0.76 represents a sequential increase of $0.08.

Finally, the guidance for the full year. The mid-point of our revenue guidance at $6.77 billion is down $30 million from the mid-point of the May guidance, or down $10 million adjusted for changes in currency. EMG's down approximately $20 million, where LDA's up approximately $10 million. At mid-point, we expect EMG revenues to reach $2.89 billion, down 12% on a core basis, and LDA $3.88 billion, up 5% on a core basis. Overall, Agilent revenues of $6.77 billion at mid-point will be down 3% on a core basis.

Regarding EPS, we are raising the mid-point of our fiscal year '13 guidance by $0.06, to $2.84. To note, our restructuring plan impacting about 500 employees is on track, and most of the $50-million savings will be achieved by the end of Q1 fiscal year '14. With that, I'll turn it over to Alicia for the Q&A.

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

Of course.

(Operator Instructions)

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

Yes, just a couple questions on the EMG business. Bill, could you just kind of lay out your expectations for the aerospace defense business -- maybe over the next 12 to 24 months, when you just think about how sequester plays into the US piece? Is there any visibility offset rest of world, there? Do you feel comfortable that can continue to offset most of the sequester decline in the US?

It's a great question. I'm going to have Guy make a comment, as well. As you know, in the aerospace and defense, the team is really focused on satellites, guidance systems, operational surveillance. We've been very pleased with our success outside the US, but I think every quarter is always a nail-biter to know exactly where the US is going to end up. So Guy, maybe you can make a couple comments in terms of at least what you're seeing in the short-term on the US defense spending.

Sure, thank you, Bill. Definitely if you've seen our revenue was up 1% in this quarter, mostly because of very strong orders from the international business and places like Europe and Japan for some very exciting business, I must say -- satellites, mostly. Going forward, our Q4 is seasonally usually one of the strongest and highest quarters for the US DoD and aerospace defense; and that's really going to be the key focus. We have seen a number of engagements. We must say we get a lot of people asking for quotes going forward, but the real issue is how much authority and how much budget will these people have in Q4. That's going to be the big unknown that we have to work through in Q4 now.

Okay. Just one follow-up, then. On the Life Sciences piece of the business, the booked-to-bill is seasonally softer than normal. Is there a read into that?

Yes. Overall, our orders were just slightly a little bit below what we would like going in Q4. I don't think there's any particularly alarm, but I'll have Nick make a couple comments in terms of what he's seeing in the Life Science from an order perspective.

Yes, just consistent with Bill's comments, not exactly where we would have loved it to be, but no real alarms. The pharma guys are still very strong, and the academic sector is, as we said, soft with a lot of concern and confusion. At this point, we flushed a lot of back log, which is a good thing; and we're looking to recharge that this quarter.

Okay. All right, thank you very much.

Thank you.

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

Hey, good afternoon. Congratulations on being able to get a good quarter under the belt despite the challenges that everyone knows that are out there. I guess, Bill, on the Electronic Measurement side of the business again, you mentioned obviously this Apple deal. We can do the math on the impact -- I'm sorry, the big wireless customer deal -- we can do the math on. You mentioned some new products that you're going to be launching in electronic, in the handsets manufacturing, as well as in R&D.

I guess sitting here today, I know you don't want probably want to give an outlook for 2014, but how are you feeling about where you're positioned from a product standpoint, and all the different moving pieces in the comps? What's your first take on where you think that business is going to be doing over the next 12 months all-in?

Again, I'll have Guy make a comment as well, but overall I think the communication, mobility is going to continue to be a driver for the Electronic Measurement business going forward. Irregardless of the one customer deal, we have a very strong product position. I'm very excited about the products that we have in the pipeline. We're not backing away from this market. We're going to continue to invest. Market share changes over time, but the underlying essentials of the communications market, particularly in this whole area of mobility, radios, in every mobile device, I still think is a great opportunity for the Company.

Yes, this is Guy. If I can add, definitely there's a lot of innovation going into this sector. As you know, there's new challenges because of the spectrum they use; and now standards like LTE advance and carrier aggregation and into wireless networking, a lot of new things happening that provides quite some opportunity in R&D and in manufacturing. Our new products portfolio is doing well. We just introduced the wireless connectivity test set that is really focused on testing wireless standards, like 80211AC, and we have received our first orders, and very promising for the future. Then as Bill was saying, we work obviously at the next generation of platforms that you'll hear more about later.

Even though that -- in closing, even though we have some difficult compares due to one issue, we are absolutely committed to this market, and we will continue to be a leader in this market, and we will continue to invest heavily to ensure that we provide leadership products in the communication market.

Bill, just to be clear, guys you laughed at that one issue obviously; but as you -- I know you're not giving guidance, again, but everyone after this quarter that you've -- you have one quarter left, so the Street will be obviously putting targets out there for next year. Are you willing to quantify at all what you think is a reasonable assumption for EMG in 2014?

You're going to have to wait until next quarter's earnings call. As you know, that's when we historically give our guidance for 2014.

Okay, that's fair. If I can, a follow-up on the Dako business. I don't know if there's any kind of commentary. I know for Roche and for Lika, it was kind of a weak business as well, particularly in the US; but it seems like relative to kind of where you had hoped that business would come in, it's a little bit softer. Can you maybe talk about what you think the main drivers of that are, and what you think can get that business growing at a rate that you need it to, given the acquisition that you did?

I'm going to make a comment and turn it over to Lars, but we are very excited where we're going. The market's slowing down, as you said. The good news is that means we're really close to where the market is -- lower number, but we're highly competitive. As I said in my notes, we're going to be launching Autostainer, which has been the biggest impediment to their growth.

But what I'm also particularly excited about is the Agilent products that are being sold in the Clinic and Diagnostics. We had a small number, but still a very solid growth in the clinic with the Agilent products. I've just been very pleased with Lars' ability to pull the two organizations together and really focus on what I think is going to be an exciting growth opportunity for the Company. Lars, why don't you give some of the details of where you are, and obviously comments about the growth rate that Didier noted for next quarter.

Yes, that's a bit of a exciting time we are in right now. Let me address the market perspectives that we see here. Fundamentally, the volume growth of the markets are there in the vast majority of the geographies. Obviously, we've seen some guideline changes in the US market that in my book, and also the view of the industry, is going to be there kind of temporarily. You see that impact probably for another quarter or two, until that flushes out and that becomes annualized. But the overall volume growth in Europe, as well as in APAC, is very robust and very strong. I don't think that there is any panic in terms of will these markets still continue to be an attractive market and will it pick up. In my book, it will be. Again, it's going to take maybe a quarter or two.

Now, Dako performance relative to the market; while it's safe to say we have improved our relative position -- maybe not in the, to the extent we had hoped at this point in time. Because obviously we want to drive growth, and we are right now I would say holding the market growth. We are probably growing at 2%, 3% for core Dako. It varies between the product lines, and the overall market, I think, characterizes somewhere around 4% growth rate right now.

We are kind of flattish with the market, but we are right now in a real crossroad situation, where we are switching between the old platform and now about to launch full speed ahead new Dako Omnis that we are still kind of controlling in feed sites. We have a fairly large amount of systems out there, and the feedback from the customers is really stellar at this point in time. Very important note would be around the staining quality that we see for Dako Omnis switches, at the level or even better than the prior stain platform. This is a really strong feedback, because staining quality is something which counts and something that Dako has been very known for in the past.

I'm very excited about what I'm seeing here, and talking about a couple of the growth drivers. Dako Omnis is a very powerful instrument. It's geared at some larger accounts where Dako has typically has had the smaller market share. We do expect a pick-up to come, and it's going to be an incremental pick-up in terms of by volume, as well as larger accounts. I'm pretty pleased with what we are looking into right now in the initial forecast, the roll-out for the pathology business in Q4. Again, I'm going to save my gun until the next quarter talking about '14. But business is picking up and the team is getting really motivated and ready.

I think in terms of [vitality] index, Dako is probably going to post one of the more powerful new product pipelines unleashed now -- being unleashed, but also hitting the market in '14. In a sense, I think we have bottomed out. From here on I think you'll see Dako pick up the pace. My expectations is that Dako is going to be above the market growth right here in a couple quarters. We are making progress, and the business is very healthy for us right now.

Just a 30-second comment on the GSD part of it. Very pleased to see now how the momentum is building and gaining for the GSA business. You see our penetration, and that's our strategy, into the clinical segment actually, paving the way for the growth rate. Looking at the core growth for GSD this quarter, which is around 8%, that compares very well, very favorably with the friends in the industry that we compare ourselves with every quarter. Pace is picking up, momentum is picking up, enthusiasm is picking up, and profitability is picking up for the business. Stay tuned for more news on the DDB business going forward.

Great, thanks for all the color. Congrats again.

Your next question comes from the line of Daniel Brennan from Morgan Stanley. Please proceed.

Hi. Thanks for taking the questions. Bill, I was hoping maybe you can start off by just highlighting your top-down view, how you feel, if you look back last quarter at this time versus today? I know you're still highlighting a lot of challenging things going on, but you're executing through that. Is it fair to say there's no difference, or are you seeing any pockets of improvements? Certainly some results have improved certainly in US and Europe, while China continues to tread. I'm just wondering overall how you feel about the globe?

Right now, in terms of our LDA business, as we had indicated, both on a core growth rate and forecast for Q4, we're clearly gaining momentum on our LDA business. We had some great momentum, hit the slow-down, our growth rate was at or slightly below market. I think our momentum is going to go back to at or greater than market. Again, a lot of that is -- Lars just described moving forward. Our Chemical Analysis and Life Science business, I believe, will have momentum going forward. As I noted in my notes, our progress in the BRIC countries and the investment we made continues to pay off.

On the Electronic Measurement side, the forecast is until we get through the tough compares, I think it's an industry that's under a lot of pressure, both from the change in technologies to mobility, the change of who the winners are versus the losers, it's a highly competitive market. As a result of that, it's still a tough environment. If it's any sort of macroeconomic improvement, sorting out exactly who the winners are going to be on the technology side, Electronic Measurement of course comes roaring back. I think that's still wait and see. LDA is clearly -- we're gaining momentum as we go into Q4.

Okay, great. Maybe sticking with some of the prior questions on EMG. As we think about Q4, can you just remind us, does that -- I know you may have mentioned this in the prepared remarks, but maybe I missed it. Does the loss of that one customer, is that impacting your Q4 guidance? If you strip out that loss, is there a better rate of growth you would be achieving? Within communications, particularly, there's been a lot of rhetoric about this China mobile business. I'm just kind of wondering how you guys think about the build-out of LTE in China, if that possibly will have an impact on whether it will be your fourth quarter, or if we have to look into fiscal 2014 for that?

Don, this is Didier, I'll take the first part of the question. Yes, last year our revenues with that account were about 25% in Q2, 50% in Q3, and 25% in Q4. When I provided the guidance for Q4 that EMG would be down 11% on a core basis, excluding that account, EMG would be down 6%. Now the second part of the question for you, Guy?

I may take at least the question on the China mobile discussion. This is obviously something that is very visible. You know that China mobile is in the middle of selecting now their suppliers, so you have opened the bid. It is our understanding there's at least nine companies bidding for this, and they will decide by end of August, early September, who is going to be the winners of this. Obviously, we are very well positioned with all of them. We follow [Intractus] business very closely. But then I still would like to make sure that everybody understands that the size of the opportunity is in my mind more in the $30 million, plus or minus $10 million.

Again, when you think about all this, China mobile has planned to announce to spend about $6.7 billion on this deal. This is before bidding. We don't know what the real deal is going to be part of. Only half of this volume is going to be really electronics. All the rest is going to be buildings and a lot of other supplies. This means that when you look at the test side, especially with the capacity that is in already in the system, and depending who's going to win, the opportunity is what I said. We're tracking this very closely. On the other side, I think it will also provide a real gross vector for the overall 4G, especially in China, as we go into '14 and '15, and as China develops the 4G network going forward.

Great, thank you. Maybe one quick one for Didier. On the buy-back, you certainly utilized a fair amount of it in this quarter. Is there any possible signaling with that buy-back, being so aggressive this quarter versus leaving a little in the fourth quarter, in terms of your view on the stock price? Where it was throughout the quarter versus your expectation going forward? Thanks a lot.

Well, we were opportunistic, obviously. We did raise $600 million in debt. We had initially -- we thought we would count on more the $300 million that will come in November. But because we had that amount available, and we felt the time was right, we just jumped in. We still have the $300 million that comes in November as tax-effective cash repatriation, similar to last year's $550 million.

Great, thank you.

Your next question comes from the line of Tycho Peterson from JPMorgan. Please proceed.

Maybe one for Nick, just on the pharma comments earlier. You've talked about technology upgrades. Can you maybe just talk about how much of that's on the LC side versus mass spec; maybe talk about any share dynamics there, and are you actually getting traction from the new product launches yet, or how do you think about pacing there?

Thanks for the question, Tycho. Let's see if I can break that down for you. We're doing pretty well in LC. The new product launches aren't having much of an effect yet. We're getting orders but not revenue. Pharma guys are doing well in terms of buying. We are at the end of their upgrade cycle in terms of replacement, but we're still seeing a technology buy-up cycle. So there's a good secular growth, and that's been strong in pharma. Mass spec for us has been a little bit softer in pharma. We see pharma still buying technology, but right now they're looking heavily at Triple Quad. There's been a lot of you new product in the market, and there's a lot of evaluation phase. Orders are kind of in the slower spot there.

Okay. Bill, to your comments on EMG earlier, as we think about the outlook there -- and I know you didn't really want to talk about '14 that much -- but what do you think about the next 12 to 18 months for EMG? Is it fair to take your fourth-quarter number and use that as a starting point for a recovery, or how do you think about the lumpiness of the recovery for EMG.

The issue that you have in EMG if you look at it historically is that there is a recovery in macro, and continued investment in communications, and the new product launches we're going to make are successful, they tend to do incredibly well. I think that's what we have to see. Do we see continued strengthening in the world economy? Does EMG themselves come out with a next round of competitive products and we're able to capitalize on that? You can get a lot of movement of revenue correspondingly. I always joke about this business. We always try to forecast it, and all we know it's wrong. So it's either going to be higher or lower. Again, if you look at their history, they historically have always come roaring back with some economic tail winds, and of course a great set of new products.

Okay. The last one on environmental, you cited the weak government spending. Any hope that business may turn around, kind of given the backdrop?

Mike, what do you -- what's your view on the environmental market?

Great question. Let's trace the source of the down-turn we've seen in the space. It really all is tied to weak government spending, primarily the US and Europe, and a bit in Japan. That really has infected the business, both at the federal and state level, for example, in the United States. I think the glimmer of hope in this segment -- and I still think it's going to be subdued for a while -- is the strength of the emerging markets, because as Bill mentioned earlier, across the board double-digit growth.

We are seeing some increased volume in the environmental side, on the private sector related to fracking, where in the US a lot more samples running through our private contract testing labs result -- checking water samples in the local environment. I think the story is all about the government spending in a lot of the key large geographies. Your crystal ball in terms of what will happen in terms of their spend outlook is probably better than mine.

All right. Thank you very much.

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

Thanks very much. If we could stick with LSG just for a minute. Nick, I wanted to ask you about the operating margins which were strong in the quarter. You mentioned that the backlog you were able -- as I seem to recall, you were able to extinguish it. The question really is, can those operating margins continue through Q4? Second, if I may, Bill or Guy on EMG, if we take out the larger customer concern, would we -- could we suggest that EMG business literally has troughed, and that also reflects a trough margin where we are today? Is that possible? Thank you very much.

Tony, thanks for your question. Yes, our operating margins are a work in progress, and that's the good news to your question. We still have some real mileage to go, particularly (inaudible), which has some weak margins in there. I think we are making progress, and I think it's a work in progress. I'm pretty optimistic on where those go sequentially.

Thank you.

I might have Guy make a comment, at least in terms of the trough, and also have Ron talk about the progress we're making in manufacturing. Again, yes, we talk about the macro-environments, but we are attempting to control that what we should control, and that is our manufacturing efficiency, and obviously our expense structure.

Yes, I would say if you just draft the order growth rates of EMG over the last quarters, you could say that order rates is now picking up, and we have had the trough bottom is behind us. Now, obviously, it's all about Q4 and how this is going to shape up and the new products, as Bill was mentioning.

Our manufacturing consolidation programs continue to be on track, and we're doing a real effective job of taking millions of dollars out of the system. We saw over $50 million worth of cost reductions last year, roughly that same amount this year, and then more coming after that. We're very pleased with the manufacturing consolidation, and we look forward to delivering more to the bottom line.

Thank you.

Your next question comes from the line of Brandon Couillard from Jefferies. Please proceed.

Bill, I appreciate your enthusiasm on EMG, but is the absolute level of EMG bookings not concerning here? I mean, I'm not speaking about comps or one customer, but just the fact that EMG's run rate is some 15% of trough levels back in FY '09. It just doesn't feel like nearly that bad in the macro back-drop. Can you offer some context into that?

From my perspective again, welcome. Guy said the group in itself -- irregardless of the one customer opportunity -- it continues to go through the transformation. We continue to invest in communications, in a very tough competitive environment. We continue to make investments in a module instrumentation that we must win in module instrumentation. It's going to be a multi-year effort. We have another quarter of very solid double-digit growth moving forward. EMG in the sense is how do I protect the bottom line for Agilent? How do I ensure I take the best communication business that I can, and how do I invest in the future?

Again, always the question is as we go to module business, how much of that is substitution versus wining in the broader market. Again, Guy will have a comment, but we are making the investment in EMG to ensure that they have the portfolio of products -- and the only one that has a portfolio of products to have low-cost transducers, just enough test, to having these very feature-rich instruments that we've been noted for, for the last 75 years. Again, we've got a lot of moving parts inside of EMG, but from my perspective, having watched the business for many decades, I'm absolutely positive that we're focusing on the right things. Guy?

I would just add that for all the product categories that we have in our portfolio, we have a very strong leading position. I'm glad to see that again we keep taking share in oscilloscopes, for instance, as we go forward. The modular program, as Bill was mentioning, is growing extremely fast -- and on new application. That's really of interest. So ongoing focus on the core markets where we see growth going forward makes a difference, and will make a difference.

The last comment I would have -- and again, this goes back, and not to be an excuse, is we've always had a very strong position in manufacturing. We've always had a strong position in computers and semiconductor. As you know, the computer and semiconductor market are not great. We've had some bad breaks on the mix. Again, we chose that business, so again I'm not making an excuse; but nevertheless, I can't state strongly enough that we're making the right investment, and we're focusing on the right products for the long haul.

Thanks, and then just one follow-up for Nick. Can you speak to any Japan stimulus impact that you may have experienced? Is that more of an order phenomenon, or was there any contribution in terms of revenue in the period?

Yes, Brandon. Right now it is order noise, primarily. There's probably a little bit of revenue leakage. But we are pretty optimistic in what [Abay] is doing there in trying to drive enthusiasm, and we are seeing some monies come out of the private sector, just because of the enthusiasm of growth. Obviously, it's not government money, but right now the stimulus in Japan is more noise and order optimism than it is revenue.

Great, thank you.

Your next question comes from the line of Patrick Newton from Stifel. Please proceed.

Yes, thank you for taking my questions. I guess for Bill or Guy, I wanted to drill down on wireless manufacturing. Post some of the share shift over the last year, can you help us understand the revenue contribution that wireless manufacturing is currently within either communications or EMG? I think earlier you replied to a question that you expect to be a leader in the communications segment; but if we dig specifically into communications and focus on wireless manufacturing, given the entry of two very disruptive competitors, would you expect wireless manufacturing to be a driver of growth over the next few years?

Guy?

Well, let me start with the second question then. The wireless manufacturing business, as we said, has always been very lumpy, and depends on a few set of players. We are a player in this environment. We have a platform that is currently winning, and as we mentioned earlier, we are working on a new generation of platforms that will allow us to compete even stronger in this market place. Clearly, we keep focusing there.

The core element are still in interest of our future going product lines is in the R&D sector. We have an extremely strong set of portfolios from software simulations that goes into R&D, up to design validation and conformance testing. We will keep driving, upgrading, and updating and adding more solutions into this portfolio, to really keep playing a role in the wireless full ecosystem, from R&D to manufacturing.

And on the revenue contribution?

The revenue contribution of wireless manufacturing in Q3 was $92 million of the $701 million.

Perfect. Bill, you discussed strength in modular instrumentation in the quarter, and you stated that you have to win in modular instrumentation. Can you help us understand, just so we can get a sense of what level the strength is coming out of, what is the revenue contribution of modular instrumentation currently to EMG segment? My perception is that it's very low-single-digit percentage contribution. Is that a fair approximation?

You mean margin contribution?

No, revenue.

Well, I think we mentioned it in the last earnings call. It's still a small percent, but we're blasting through $100 million, not counting the software part of it. We mentioned that in the Analyst Day. We continue to grow double digits, and we're spending $70 million a year to win. We are absolutely committed. Ron has mentioned this many times, we've been in the module business for years. But if you put our software efforts together with our module instrumentation, I would -- my guess is Ron, it's getting fast to close to 10% of the overall EMG. We're making real progress.

Perfect. Perhaps for Bill or Didier, I may be reading too much into this, but your fourth-quarter revenue and earnings guidance range appeared a little bit narrower than the range you provided in the past quarters. Should we interpret this to mean perhaps you're a little bit more comfortable with the stability of the business; or conversely, could this mean the tightening of your delivery policies has led to fewer vacillations in deliveries towards the end of the quarter that's given you a little more comfort?

Just a lot easier to give guidance when there's only 13 weeks left in the year.

Even on a quarterly basis it was narrower. I'm not talking about the annual guidance.

No, I understand. I understand that. But we're comfortable with the guidance that we've given, given the backlog and expected shippable orders.

All right. Thank you for taking my questions.

Your next question comes from the line of Dan Leonard from Leerink Swann. Please proceed.

Great, thank you. Maybe a question for Lars. Lars, I'm trying to reconcile what was very positive commentary on Dako with some of the proposed reimbursement cuts here in the US. In segments, it looks like they might affect you, like FISH and special standing, and what have you. Could you address how you're thinking about potential cuts with your mix of business, and the opportunity going forward?

I see that obviously we are very well aware about guideline changes and potential reimbursement changes that might impact our businesses overall. I think if I step back and look at our overall position in the US market in terms of (inaudible) chemistry and the FISH business, we are starting from a fairly low position. If I were sitting on a market share with 65%, 70% for FISH or ISH or ISE, I would probably have a couple a sleepless nights.

But then we start literally from a single, low-single-digit market share position in the FISH business, and a relatively low market share on ISE. I still see this as incremental up side for us going forward, given the fact that we are now going to penetrate new segments. It depends on -- if you talk to some of our competitors, I think they have considerable different exposure than the Dako organization has.

Got it, that's helpful. Thank you. My follow-up question for whoever wants to take it. We're nearly six months now since you shined a brighter light on your efforts to improve NMR. Wondering if you could offer more color on the progression in those efforts? Thank you.

Nick?

Thanks for the question, Dan. We continue to slog through NMR. If you recall, the challenge here is really to reformat the business. We've done quite a bit of that; then to reframe the manufacturing -- that process is pretty much complete; and then to launch new technologies. We're in that cycle now. We've got technologies flowing out now that utilize our electronics capabilities in the core platform.

We continue to evolve, and we're going to disseminate that further and further across the product line. We've also refocused the business away from the academic sector and more heavily towards the industrial sector, and that's just a reflection of the macroeconomic. So work in progress. We continue to slog through. It's not a pretty picture, but we're on track to what we showed you when we were in New York.

Got it. Thank you very much.

Your next question comes from the line of Isaac Ro from Goldman Sachs. Please proceed.

Thanks, guys. Good afternoon. First one was on China. You guys did touch on it a bit selectively in your prepared comments. I was wondering if you could give us a bigger sense of the bigger picture, in terms of how orders trended throughout the quarter? Then maybe put that in context of what we saw in China regarding credit conditions, and just general capital spending? It seems like we're clearly long-term secular growth opportunity, but still a little choppy in China for the back half of this calendar year? Any color there would be helpful, thank you.

In terms of China, the story for China for us is in LDA. Mike, why don't you talk a little about it. I know a lot was in the applied side, and of course, if Nick has any comments moving forward. The electronics side, of course, is dominated by -- depending on who the big players are that we won and what not. Really, the story in China is on the LDA side. Mike, why don't you give some color on your China business last quarter?

Yes, sure Bill. I think this is more than just a quarter story. In fact, you may recall some of our previous conversations, a prior analyst call, where we talked about there had been a pause in the business latter part of last year, with the reformation of the new government, and their emphasis on improving the quality of life and the China dream that we were very bullish on the prospects for our business in China. In fact, we are now seeing that come into real orders into the business.

I think consistent with that philosophy in terms of the focus on improving the quality of life, we're seeing -- continue to see very significant investments in the food segment, as well as the environmental testing segment. But also strong growth in chemical energy as they continue to build out their industrial infrastructure. We can point to all the segments in the applied side as being up in China, and I think indicative of the long-term secular trends that you referred to earlier in your question. I know the question comes up about the impact on possible credit tightening, we've not yet seen that in our business.

Okay. Sorry, go ahead.

Sorry, Isaac, I was just going to add -- this is Nick. Same comments as Mike, the pharma industry pretty strong building out infrastructure. We're pretty insulated. If you look at the macro credit challenges, that's in the housing industry, it's in the consumer products, and it's in the factory infrastructure. Pharma factories are getting built up by multinationals as well as governments, so that hasn't been impacted. We're very bullish on what's going on in China.

Got it. Maybe for either Nick or Lars, a question on diagnostics. If I put your comments on Dako and then your other genomics tools sort of in context here, can you give us a sense of how much work you think you need to do to build out the franchise going forward? You've obviously got a lot of stuff in the pipeline already organically; but just to sort of get that business to critical mass relative to the competition and relative to your other divisions, can you give us a sense of how much work you think you have to do there?

Lars?

Yes, let me take a crack at that one. It's a good question. Actually, I came out of a break-up meeting with my team yesterday where we addressed that situation. It's obviously a great pleasure to be part of Agilent, but all of you can see we are a small part of Agilent. I think we have the prospects for it because the market opportunity is certainly there.

Obviously, the organic growth play that we see can be either high single digits, up to maybe mid-single digits -- depends on how you look at the business, how aggressive you found it, and so forth. This is going to be a transformational industry in our book, and we think we have to think big to participate here, because it will continue to consolidate, and the fewer is going to get bigger. It's a choice that we make on how we're going to take about that business. Obviously, organic growth rate is going to get us a bit. But in my book, we have to look big here and see the opportunities that are ahead. Obviously no commitment on time or any significance of that, but there's a great number of opportunities that we are looking at right now.

Got it. Thanks, guys.

Your next question comes from the line of Ross Muken from ISI Group. Please proceed.

Good afternoon, guys. Maybe talk a bit about how the organization responded to some of the cost measures you did? Obviously, it's always tough environment to adjust work force, et cetera. It looks like on the OpEx line, and even on the gross margin line, you guys did a really nice job in execution. Maybe just give some comments in and out on where you're -- how do you feel like the organization responded?

I'll give my perspective because I didn't have to do the work, and then I'll turn it over to Ron, who did do the work with the team. Our organization responds to task, adversity, reaction to market conditions incredibly well. We know how to do this. We have a very robust Management system to ensure that we can execute on the strategy, even if it's a tactical one in terms of reducing costs. But as Didier alluded to, we're right on track, and the team has executed. We've done it in such a way that the employees impacted were treated fairly, respectfully. Again, we continue to ensure that they can hopefully do everything we can that they can land on their feet. From my viewpoint, I think the execution has been excellent. Ron?

We have a very smart, well-educated work force. They understand how their job is to provide shareholder value. As we've seen this economic situation, they understood what we were doing, and we've seen great support. All of the functions that were involved managed to go through this, and it's very -- it's going very smooth. It's very difficult to see some of the reductions, but on the other hand, everybody gets it, and I'm very pleased with the progress.

Thanks, guys, and congrats on a good quarter.

Thank you.

Your next question comes from the line of Doug Schenkel from Cowen & Company. Please proceed.

Good afternoon. Really, just three quick clean-up questions. First, Didier, could you provide assumptions for fiscal Q4 operating margin by segment, at least what you've incorporated into guidance? Second, I guess for either Guy or Didier, I just want to confirm that there's no tail to the large -- I guess it's $230-million order loss beyond fiscal Q4? This was obviously a multi-quarter head wind for EMG this year, and I just want to confirm that this was attributable to only one account loss, and that this is essentially a discrete, one-time dynamic that will be behind you after this quarter?

Then third, Nick, earlier you spoke about the booked-to-bill in LSG coming up a bit light of your expectations, yet it seems like you guided LSG revenue growth in Q4 to levels that are at least in line, if not maybe above Street expectations. I was just curious if you would talk about whether or not you saw some strength in ordering patterns, maybe early in the quarter? Thank you.

I'll take -- hi, Doug. I'll take the first question regarding operating margin in line with the guidance for Q4 for EMG and LDA. It's about the same, slightly -- both of them slightly north of 19% for the both EMG and LDA, and obviously slightly above 19% for Agilent overall at mid-point.

The question on tail of the order, we got some orders in Q1 that we shipped in Q2, so that's going to be a tail -- but far smaller than what we had as compared so far.

The analysts should assume that after Q4 it will be a normal order shipment pattern?

Very close to it, yes.

Doug, to your question, we did have a rising trend of orders across the quarter, so that's the first part of your question. In Q4, we've got a little bit of an easy compare as well. That's why you see the kind of guidance we get. We think we're pretty sound there.

Okay, thanks. That's all very helpful.

Your next question comes from the line of Amit Bhalla from Citigroup. Please proceed.

Hi, this is actually Adam in for Amit today. Nick, I had one to start for you. On the -- in the pharma business, can you make any comments on what you saw in the early-stage discovery business there?

Not sure I quite understand the question. You mean in terms of what they're ordering, or what the pattern is?

Yes, I mean just how did they fare during the quarter? What did you see coming from that side of the business?

Yes. What we're seeing in early-stage discovery, that's where we see most of the technology stuff. Most of the technology upgrade, because what they're doing in early-stage discovery across the whole therapeutic sector is biologic. That's a big driver for mass spec, and it's a big driver for our biologically compatible LC, not to mention our general UHPLC product. That has been a pretty strong sector. That was probably the leading piece of the pharma portfolio.

Okay. Overall on Europe, was there anything there that stood out? I know it was weak in the quarter, but any end markets in particular that were stronger than expected?

Certainly, within LDA, as I mentioned, Europe grew an a core growth basis, whereas EMG was down. That gives you an indication of what markets are up, and which ones are down.

Okay. Did you -- were there any overall trends in the quarter on the revenue side, as far as pacing goes in July, and maybe early into August?

In terms of revenue?

Yes, in terms of --

Given that we still have a very high percentage of capital equipment, our revenue is always tends to be back-end loaded in the quarter; and that's why we continue to report orders, because they really are a good indication of future business. But just, we typically ship more in the last month of the quarter than the first. Of course, once you start doing that, it lasts for decades.

Okay. All right, thank you very much.

Your next question comes from the line of Tim Evans from Wells Fargo Securities. Please proceed.

Hi, thanks. Bill, I wanted to ask a question about the overall business mix from a high level, from the standpoint of cyclicality versus non-cyclicality. Notwithstanding the work you've done over the past few years to try to reduce the cyclicality, the business is still fairly cyclical. Would you anticipate wanting to make any changes -- whether it be additions to the portfolio, or subtractions from the portfolio, to kind of change that going forward, or are you kind of happy where it is at this point?

The strategy that we embarked on in 2005 after we spun off our semiconductor business has proved very effective. We will soon have a $4-billion LDA business, not to give a forecast next year, but we're very close to that. The investment we made both organically, inorganically has been exactly what we wanted to do -- bring our engineering expertise to be able to expand from our engineering, chemical engineering foundation to Life Science and Diagnostics moving forward. That will be continued investment that we have.

The volatility we have, of course, is in Electronic Measurement. They've done a superb job of managing the operating margins through what is just inherently a very volatile business. I believe that we've executed on our strategy, and we will continue to focus on growing our LDA business, and continue to be a leader in Electronic Measurement with what is really the highest profits in the industry.

Okay, thanks. A quick one for Lars. On the cytogenetics market, you talked about some strength in the array business there. Do you anticipate that might cannibalize some of the opportunities in the FISH market? I know that was part of the thesis for the Dako acquisition. I just wondered how this -- the idea of growth in the cytogenetic arrays plays into that outlook?

No, I don't think that's going to be a large degree of cannibalization, honestly. I think the CDH or the arrays plays its role. The FISH is going to be there for [firmatary] testing, and so forth. There is still a lot of room for growth for a Company like Agilent coming in with the FISH business there through an entrenched competitor. I think it's fair to say we are making good progress there as an organization. Now developing a universal type of probe that's going to fit both on the (inaudible) on the [cyto space], as well as the pathology business. I don't think that is a trap at all; it's just a great opportunity for a Company like Agilent.

Thank you.

Your next question comes from the line of Derik De Bruin from Bank of America. Please proceed.

I just wanted to get -- ask a little questions about the Academic and Government. You have about 7% of the revenues in the quarter from Academic and Government. That's not the Aerospace and Defense portion of it. Yet you said you were down about 7% in that market. I'm just curious, what was that excluding currencies? The reason why I'm asking is that you have relative to your peers a lot less exposure to some of the academic markets out there, and I'm just curious to see what specifically is -- I'm just curious as to why your business may be a little weaker than some of the -- maybe some of your peers are reporting? Is there something going on there that I'm missing?

Derek, I'll answer the question, obviously from the Life Science perspective. I don't think there's anything you're missing. We are a big CapEx engine in Academic and Government. As we're getting towards the end of the fiscal year for the US, that's where the big stall in the sequestration's coming. I'm not sure that our exposure was -- our exposure's certainly less in aggregate than others, but I'm not sure our response was significantly different, if you cut just at the CapEx piece.

I think that's just really important. Many of our competitors have lots of consumables, lots of reagents. They're down, but they'll never be as down typically as much as we do, given the bias towards capital investment.

I was just sort of more comparing it to like Waters, for example. Their numbers were a little bit there. That's fine, I'll take it as more CapEx and NMR in that sense. On the Diagnostics and Genomics business, the gross margin in that business has been down year over year on all three quarters, despite the fact that organic revenue growth is a lot -- has been a lot better than expected in that segment, at least to my models. I guess is that due to product launches, FX, could you talk a little more about what's going on? Ultimately, where does the gross margin in that business sort of go to?

I'll have Lars talk about -- we obviously making huge investments in the business in the mix, but as I said very clearly, there's full expectations that Lars' business will get to the 20% operating model of the Company or higher moving forward. But Lars, why don't you talk about the short-term investments and what's going on.

Yes. Just to kind of address the root cause of the question. I think what you have to realize is when Dako comes in, basically through a new kind of accounting standard, there is a re-classification from what is the expense lines into the COGS line, and COGS line to the expense lines and so forth. So there is a one-off that distorts the picture to some extent, in combination with the genomic business that's kind of an ongoing operation and it's been there for years. That's a one-off phenomenon that's been washed out and sits there right now.

I think what you'll see now is fundamentally a quarter or two where we have been sort of weak in terms of a product mix which has been unfavorable. It's been skewed towards a bit more instrumentation than consumables. As you know, we are sourcing our instrumentation literally from OEM providers out there, and pay a margin on getting the boxes done for us, and so forth. As we get more the Dako Omnis solution boxes out there and drive much more reagents on top of it, we feel that our gross margins are going to creep up north.

We don't see a tremendous amount of cross-pressure or price pressure in our accounts and our business right now. It's a bit here and there, but basically this is still a well-behaved industry, with a few entrenched competitors and so forth. I see that gross margins are going to stabilize and even increase with the onset of more FISH business coming on-stream for us, which is that typically higher business. To Bill's point, what he's alluded to, the operating margin today for the group, which is 15% -- which is a little higher on Genomics, a little (inaudible) Dako -- I expect it's going to climb pretty rapidly here, with the onset of more volume and volume of consumables. I think it's a longer answer, but that's the effects that I see here.

Great, Lars. Very helpful.

Okay. I was going to add, there -- this is Didier. The gross margins for DGG really has stayed fairly, constant at 60%. It was 60.8% last year in Q3, 59.4%, so plus 1 percentage point reduction. Lars really explained the why the mix played that and basically took away, withdrew about 1-percentage-point gross margins. It's about the same. Same thing at the operating profit, was 15.2% last year, 14.6% this year. Again, a lot of the mix issues that have been raised by Lars.

Great. Thank you very much.

Ladies and gentlemen, this will conclude the question-and-answer portion of today's conference. I would now like to turn the call over to Alicia Rodriguez for closing remarks.

Well, we'd like to thank everybody for joining us today, and certainly if you have any calls please feel free to call myself or Elena. Have a good day, thank you.

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