安捷倫 (A) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Agilent Technologies Fourth-Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time.

(Operator Instructions)

As a reminder this conference is being recorded.

I would like to hand the conference over to Alicia Rodriguez, Vice President of Investor Relations. Ma'am, please go ahead.

Thank you, Karen, and welcome, everyone, to Agilent's Fourth-Quarter Conference Call for Fiscal Year 2013.

With me are Bill Sullivan, Agilent's President and CEO; Ron Nersesian, CEO Designate of the Electronic Measurement Company; and Didier Hirsch, Agilent's Senior Vice President and CFO. Joining to the Q&A after Didier's comments will be the Presidents of our Chemical Analysis and Life Science and Diagnostic Groups; Mike McMullen, and Lars Holmkvist. Also joining from the Electronic Measurement Business will be Neil Dougherty, CFO Designate, and Guy Sene, Senior Vice President of R&D Sales and Marketing.

I would like to remind you that, starting this quarter, we are reporting three segments -- Electronic Measurement, Chemical Analysis, and Life sciences and Diagnostics. The formation of the Life Sciences and Diagnostic segment was announced September 19, and represents the combination of Agilent's former Life Sciences and Diagnostics and Genomics groups.

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 the financial results under the financial information tab. There you will find an investor presentation, along with 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.

Today's comments by Bill, Ron, and Didier 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 fourth-quarter orders of $1.83 billion; an increase of 4% over last year. Q4 revenues of $1.72 billion were down 3%. Adjusted net income was $271 million or $0.81 per share. We exceeded EPS guidance, despite challenges in several of our markets, due to an ongoing period of economic uncertainty. We continue to benefit from the commitment to manage expenses and reduce manufacturing costs.

On September 19, we announced our intention to separate Agilent into two publicly traded stand-alone companies. The Electronic Measurement business will be spun off to form a new Company under the leadership of Ron Nersesian. The Life Science and Diagnostics and Applied Market businesses will continue as Agilent under my leadership. Didier Hirsch will continue as Agilent's CFO.

As we noted at the time of the announcement, Agilent has evolved into two distinct investment and business opportunities. We believe this separation will unlock value for our shareholders in both the short and long-term. We are creating two separate and strategically-focused enterprises, each one better able to concentrate on the opportunities in its respective markets and industries. We continue to make excellent progress in preparing for the split of the Company.

Later in the first fiscal quarter, we plan to announce the name of the new Electronic Measurement company. By August of 2014, the new Electronic Measurement company is expected to operate independently as a fully-owned subsidiary of Agilent. The separation is expected to occur through a tax-free, pro rata spinoff of the new Electronics Measurement Company to Agilent shareholders. We expect the separation to be completed in early November 2014, at which time, the shares of the new electronic measurement company will be distributed pro rata through Agilent shareholders of record. Throughout the separation process, both companies will continue to focus on meeting Agilent's revenue and earnings commitment for fiscal 2014. At the same time, we will increasingly differentiate the two businesses for customers and investors.

Today, I will share the performance highlights for our LDA, or Life Science Diagnostics and Applied Market businesses. After that, Ron Nersesian will discuss our Electronic Measurement performance. Finally, Didier Hirsch will provide a more detailed discussion of Agilent's overall financial results, as well as our fiscal 2014 and our Q1 guidance.

Turning to LDA, our fourth-quarter performance set record levels in orders, revenues, and operating profits. Q4 orders were $1.09 billion; up 9% year over year, on a strong book-to-bill of 1.07. Q4 revenues are $1.01 billion; up 6%. Operating margins were up 100 basis points to 21.4%, consistent with our margin expansion goals for the businesses. We believe this validates our strategic direction, which focuses on attractive end markets, a leading product portfolio, and significant operational leverage.

We saw strong growth in pharmaceutical, up 10% on technology upgrades and offshoring to emerging economies. Food and energy revenue momentum continued; up 7% and 5%, respectively, on strong demand from China and other BRIC countries. Clinical and Diagnostics revenue grew 16%, driven by strong growth in pathology, reagent partnerships and companion diagnostics from Dako, and record volumes for Agilent's legacy genomics products. Environmental and forensic markets were flat, as tight government budgets continued to constrain demand in the US and Europe. Academic and government trends reversed, growing 4% on a relatively easy compare.

On a regional basis, LDA experienced growth across all geographies except Japan. BRIC countries' performance was strong driven by growth in Russia, China, and India. Within LDA, our Life Science and Diagnostics Group, or LDG, had Q4 orders of $642 million; up 12%. Q4 revenues of $601 million were up 8%. These were both record highs for the business. Performance was led by services, consumables, LCs and diagnostic products. Operating margin was 19%.

Q4 marked the commercial launch of the new Omnis Autostainer from Dako. First installations have taken place and we're seeing a strong pipeline of orders in both the US and Europe.

And this week we introduced our new ProPulse NMR platform. ProPulse brings increased ease use to high-performance NMR in a compact footprint for applied chemical research, drug discovery, food science, and metabolomics.

Our Chemical Analysis business had Q4 orders of $445 million; up 6% over a year ago. Revenues of $412 million grew 4%. Spectroscopy, consumables and services led the growth in CAG. Operating margin was 25%.

In the quarter, Chemical Analysis launched the new 7000C Triple Quad GC/MS. The system adds new capabilities that enhance performance, simplify use, and reduce operating costs. CAG opened a new Spectroscopy Technology Innovation Center in Mulgrave, Australia. This leading edge research and testing facility includes labs for in-house testing, rapid prototyping, and customer demos and training.

The LDA outlook for FY 2014 is promising. We expect positive trends to continue across food, energy, pharma, clinical, and diagnostics markets. These trends will be supported by a strong pipeline of new products in the coming year. Our priorities will continue to be centered on improving the customer experience, driving organic growth, increasing our margins, and improving our return on invested capital.

LDA revenues for the first fiscal quarter of FY 2014 are expected to be between [$990] (corrected by Company after the call) million to $1.01 billion or 5.4% core growth at the midpoint. We expect operating margins at the midpoint of 18%. For the full fiscal year in 2014, we expect LDA revenues of $4.03 billion to $4.13 billion or 4.4% core growth at the midpoint. We expect operating margins at the midpoint of 19.5%. Didier will provide additional details in his commentary.

Thank you for being on the call. Now, I'll turn it over to Ron to talk about the Electronic Measurement business.

Thank you, Bill, and hello, everyone.

For the fourth quarter, the Electronic Measurement Group reported orders of $742 million, down 2% year over year. EMG revenues declined 14% in the quarter to $705 million. This represents a book-to-bill of 1.05, driven by relative order strength in Europe and early positive signals from semiconductor test markets. EMG also had its highest ever orders for real-time oscilloscopes in the fourth quarter. While revenues were down, EMG delivered 19% operating margins for Q4, reflecting excellent gross margin management, tight expense controls, and an increasing flexible operating model aligned with the requirements of changing global market conditions. For the full year, EM revenues were $2.9 billion, with an operating margin of 19%.

Taking a closer look at EM markets for the quarter, industrial, computers, and semiconductor revenues declined 10% year over year, but as I have already mentioned, our orders reflected positive signals from the semiconductor test markets. Aerospace and Defense revenues declined 11% year over year versus a tough compare in Q4 2012, which included a surge in US demand in advance of sequestration budget reductions. Q4 2013 Aerospace and Defense revenues were lower year over year in the US and Asia and were partially offset by strength in Europe. Communication revenues were down 19% in the fourth quarter and down 5% adjusting for nonrecurring business from the wireless manufacturing customer that we discussed in our Q2 earnings call.

EMG continues to make a significant investment in modular instrumentation and recently introduced two new modular communication test solutions. In Q4, we introduced a PXI Vector Signal Analyzer aimed at wireless validation and testing. Earlier this week, we launched our next-generation wireless manufacturing test solution, offering our fastest and most accurate parallel device testing capability for leading-edge wireless LAN and cellular technologies, such as 802.11ac and LTE advanced. Sales of our PXI and AXIe modular instruments continue to grow rapidly.

Our priorities for FY 2014 are to launch our selves as an independent company focused solely on electronic measurement customers; to strengthen our position in wireless communications; and to continue to generate strong profit margins for our shareholders. We are implementing a detailed plan to separate EMG from Agilent and to create a stand-alone, pure play electronic measurement company. There is a lot of hard work that remains to be done, but we are progressing according to plan. In addition, we remain focused on delivering world-class quality, innovation, and customer satisfaction.

In FY 2014, we expect EMG to return to a growth position for three reasons -- one, longer-term growth drivers for the industry remain intact; two, economic indicators suggest a modest improvement in the global economy; and three, we continue to strengthen our product portfolio. EMG revenues for the fiscal first quarter are expected to be $680 million to $700 million or a negative 2.8% core growth at the midpoint. We expect operating margins at the midpoint of 15.5%. For the full fiscal year in 2014, we expect EMG revenue of $2.87 billion to $3.07 billion or 3.2% core growth at the midpoint. We expect operating margins at the midpoint of 19.5%.

Now, I will turn it over to Didier to provide more information on Agilent's financials.

Thank you, Ron, and hello, everyone.

Bill and Ron have already reported on this quarter's better than expected results in terms of orders, revenues, and profits. Please note that Q4 core revenue growth by segment and by geography is reported on the slide deck posted on our website. This quarter, currency subtracted about 1.5 percentage points from our revenue growth and acquisitions had no material impact.

I'll turn directly to the guidance for fiscal year 2014. Our fiscal year 2014 revenue guidance of $6.95 billion to $7.15 billion assumes the economy will pick up moderately in the first half of our fiscal year and gain more steam in the second half. At midpoint, our year-over-year growth will be 4%, both as reported and on a core basis. The midpoint of our $3.03 to $3.33 EPS guidance translates into a 10% year-over-year gain.

As you update your models for fiscal year 2014, please consider the following -- annual salary increases will be effective December 1, 2013; stock-based compensation will be about $99 million for the full year, compared to $85 million in fiscal year 2013; and as we front load the recognition of stock-based compensation, the Q1 expense will be about $38 million. Depreciation is projected to be $200 million for the fiscal year. Net interest expense is forecasted at $109 million and other income at $7 million. The non-GAAP effective tax rate is assumed to remain at 16% and the diluted share count at 336 million shares. We expect operating cash flow of $1.2 billion and capital expenditures of $250 million.

Both numbers reflect one-time and pre-separation expenses of $100 million and separation-related capital expenditures of $50 million. The one-time and pre-separation expenses of $100 million will be pro forma. We will start recording cost dissynergies only after the planned separation, i.e., in fiscal year 2015.

Finally, moving to the guidance for our first quarter. We expect Q1 revenues of $1.68 billion to $1.7 billion and EPS of $0.65 to $0.67. At midpoint, revenue will grow 1% year over year, and 2% on a core basis. As a reminder, we typically see EPS decline materially from Q4 to Q1 because of the impact of the December salary increase, front-loading of stock-based compensation, and the increase in payroll taxes due to the disbursement of the variable incentive pay of the previous semester. Also, I want to note that this year's Chinese New Year begins on January 31, 2014, and therefore, we expect little activity in Asia in the last week of our first quarter.

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

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

(Operator Instructions)

Tycho Peterson, JPMorgan.

For Didier, any updated thoughts on the tax rate for the new companies, as we think about the spin?

No. As we stated last time, directionally, EM will have a lower tax rate than average and LDA will have -- the new Agilent will have a higher tax rate, but we will provide that information when we file the Form 10.

Okay. You guys didn't specifically call out the shutdown. Can you just talk to whether that impacted Aerospace and Defense in the quarter?

No, there wasn't. We had a lot of scrambling to do in October, but we actually recovered fine.

Most of the issues were centered around, of course, getting export licensings out of Department of Commerce. Fortunately, we had two and a half weeks to get that done.

Okay. On the Omnis platform, can you just talk to some of the early trends? You talked about some of the initial placements, but how should we think about the ramp there for the next couple quarters? Any thoughts on the reimbursement landscape given some of the changes?

Before I turn it over to Lars to answer the question, I do want to put another plug-in that the Dako performance in the quarter was outstanding. The first quarter that is 100% organic growth and we are very, very pleased with the overall performance across the board in Dako. With that, I'll turn it over to Lars to answer your questions, specifically.

Thanks, Tycho, for the question. It's a good day a Agilent and Dako, obviously. It's a quarter that we have been waiting for, for a long time and working very hard for. I'm exceedingly pleased to report out the 16% year-on-year growth of the business. If I break it down, basically core pathology grew double-digit growth rates. We had growth of our reagent partnership and companion diagnostic businesses, basically at the high double-digit growth rates, both of them. We are making good progress.

Relative to the market, I would say it's fair to say that Dako is now gaining momentum and also taking share. With regards to your comment around Omnis, number one, traction for Omnis from an order perspective is exceedingly strong. We see a strong balance between large accounts for Europe, as well as the US, now picking up steam. We have, still, a fairly small amount of commercial placements, but obviously, we are ramping them up very quickly. Performance from the customer and the feedback from the customer side is very, very strong. As we all know, this is a workhorse with an unmatched capacity; obviously, fully automated and over time, it's going to process a large number of FISH slides. This is still to come.

What you see right now is obviously a system with the first wave of antibodies, which comprises the normal immunohistochemistry stains that we are out with. As we move forward into 2014 and also 2015, it's going to pick up even more steam in terms of the ISH component of it. Feedback is good.

I would say, from an impact point of view, Tycho, this quarter, it's a fairly marginal impact, obviously, a couple of cash deals. I would expect that as we move into 2014, the second, I think more profoundly the third of the fourth quarter, you'll see the impact of more of the placement and the impact of the reagents that we'll obviously get up to speed there. In terms of the reimbursement, while we still have to see the impact of the reimbursement, and the vote will come down on that, I think compared to our competitors out there, I think Dako is going to fare pretty well, because obviously, the penetration that Dako has in the US market is on the low side. For Dako, I think it's going to be more of an opportunity to really make sure that, as consolidation picks up, which we believe it will be one of the impacts of reimbursement changes for larger accounts, I think that Dako Omnis is a workhorse that's actually going to pay very, very nicely in that regard.

Great, thank you. Congratulations on the quarter.

Brandon Couillard, Jefferies.

Didier, could you quantify the incremental restructuring and order fulfillment/supply chain savings that's baked into the guidance for next year?

In terms of the restructuring, we are still a little bit over $50 million on an annualized basis, knowing that this year, we'll have seen about $10 million of that mostly in Q4. In terms of the order fulfillment benefits, no change to our previous overall guidance that the organization should deliver about $40 million to $50 million of incremental savings.

Thanks. Bill or Didier, the 1Q revenue guidance looks pretty conservative relative to the 4Q order experience being north of $1.8 billion. Is there anything unusual happening there in terms of a timing dynamic that we should be aware of?

I think as many of you know, and have followed us for a long time, anytime Chinese New Year ends in January or it's in January, the predictability of revenue recognition at the end of the quarter can be quite volatile. As Didier said in the call, because Chinese New Year is right at the very end, that a lot of Asia will be shutdown in the last week of the month. In addition to that, a lot of customers, in preparation for the shutdown, won't take acceptance.

We, as some of you know, have had difficulty when, in these January Lunar New Year years, so we wanted to make sure that we give a guidance at this point in time, we believe that we can meet without having the end of the quarter rush to get to capital equipment installed and in place, given the situation in Asia and given how large our Asia business is.

That's the big delta is the movement of Chinese New Year from Q2 into Q1.

Understood, thank you.

Daniel Brennan, Morgan Stanley.

Congratulations on the quarter. Maybe just a few questions on EMG -- could you just remind us, for fiscal '14, is there any lingering effect from that lost wireless contract?

Ron?

We still sell some products to that wireless company, but the actual effects as we go into next year become more negligible.

Okay. In terms of the 3% growth for EMG in fiscal 2014, certainly an easy comp down 12, but still, noticeable improvement, even if you factor out that contract. Can you let us know how you're thinking about that 3%? Maybe give us the buildup by segment and what type of economic growth you're assuming to get to that 3%?

Sure. I can give it to you a couple of different ways. If you're looking at it from the segment perspective, we expect Communications to be up 3%, Industrial Computers and Semi to be up 5%, and Aerospace Defense to be flat. If you take a look at what are some of the reasons for the sign of the turn -- one, we're seeing the global economic indicators are up, whether you look at PMI for new orders or global manufacturing's really improved in the last quarter.

We've seen orders from greater China stabilize in the last quarter. Our European orders were up 14% in Q4 and another leading indicator is the computer and semiconductor orders were up 22% in Q4. Again, one quarter does not make a trend, but when you put all of these things together, we feel confident with the 3%.

Great. I know you mentioned NMR, I think you mentioned the new product launch on the call. Any early color on some of the actions that you're taking there and the kind of profitability improvement you expect to drive there? Can you just give us an update on that? Thank you.

Lars?

Yes, I can take that question. I think it's a little early to say the impact of the new ProPulse as we just unleashed it, basically, at the beginning of the week. But basically, the early customer feedback from the ones that have seen it is obviously very positive with smaller footprint and actually, lower cost. Theoretically, we are looking at the higher profitability and a shift from the pure academia governmental customers to more pharma and the applied market.

But I think the verdict is still out there, we remain very enthusiastic and positive and we, obviously, expect they're going to have an incremental impact to revenue and profitwise as we move into '14 and beyond. Beyond that, we also, obviously, announced that we are exiting the pre-clinical MRI business and that's going to help us to combat some of the profitability issues as part of that restructuring. We will stop taking order and we believe that we have a backlog to ship out, which is in the next six months.

We are working hard to see how we can advance any shipments of the OEM large-scale unprofitable backlog here to make sure that we actually swing back to profitability a little earlier than before. I think it's fair to say that, back to the overall comment that we made perhaps a year ago, that we hope the NMR is going to be profitable by the exit of '14.

I think we are, perhaps, a little light on that target, a little late. We are working hard to get it fixed. We are going to come back with more precise dates and timings for when we think we are going to reach the point of profitability. But for the time being, we are not giving any forecast on the timing for that.

Great, thanks again.

Ross Muken, ISI Group.

Congratulations. Digging a little more on LDA, just in terms of the assumptions for next year, could you give a little bit more color on segment core growth and touch on the one or two sub-segments within that piece where you feel like there's the greatest sensitivity to the forecast, positive or negative?

It's a good question to have because, as you know, our performance this quarter was very, very good versus the overall market. Again, I have a couple comments and then turn it over to Mike and Lars to have their own comments moving forward. But if you look at overall market that's growing this 4% to 6% range, there's no indication, from our viewpoint, that's going to be different.

We continue to be excited in the opportunities, obviously, in the diagnostics area. Pharmaceutical, we're doing exceedingly well and we continue to do very, very well in food and energy. Coupled with that is our commitment to have technology leadership across the laboratory. We continue to make huge investments in leadership, in products.

We have made huge investments to dramatically improve our overall infrastructural software and data collection. As I said in my comments, we're actually quite pleased and comfortable with the outlook moving forward. I believe that we continue the momentum, a simplified company, the combination of our old LSG business with Lars' previous group, the coordination between Mike and Lars, I feel very good as we move into 2014. But let me turn it over to Mike to give some commentary in the Applied side and then have Lars comment on the Life Science and Diagnostics side.

Yes.

Thanks, Bill, and building on your commentary, we're also very pleased on the results on the Chemical Analysis side of the business. As we look forward to FY 2014, we're expecting continued strength in areas such as the food market we've talked about the past, a gradually improving energy market, and you saw some of the numbers we put up for this past quarter. Geographically, China remains an area of strength, along with the other emerging economies. And we are quite pleased with our performance in Europe as well, where we clearly outperformed the competition in terms of our growth rates.

The new products that we've been talking to you about over the last several quarters are having an impact on our growth and are a major reason why we were able to outgrow the competition this quarter, and we see continuation on trend happening in FY 2014.

However, we have a level of caution when we think about FY 2014, because there are still signs out in the marketplace, particularly in the United States where the government spending remains quite weak. To your question about the sensitivity to the forecast really is, will we start to see that steam movement in the replacement market in some of our more mature geographies. But really quite optimistic about our ability to grow above market, independent of what the market conditions look like in FY 2014.

With that, I'll turn it over to Lars.

Thank you, Mike.

Just a few comments around some of the end of market segments for us. We saw from LDG a pretty robust growth into Pharma, up to the tune of 10% year on year and that's obviously a strong rebound versus what we've reported out before. I think it's fair to say that the Pharma R&D spend is still under pressure, or down versus prior years to the tune of somewhere between 1% and 2% in '13.

According to forecast, we expect to see a rebound in Pharma spend in the coming years, four, five years going forward -- not to a drastic level, but certainly turning the needle and that's going to be, obviously, accretive, we believe, to our business. The impact we have seen, so far, on basically two quarters of strong pharma performance from Agilent that would indicate that we are probably gaining share here from competition. Obviously, other drivers for more of a positive outlook going forward for Pharma is the offshoring and the retooling that comes out of that, as well as the investment in biologic entities that we are seeing right there.

In terms of academic and government segment, we had a good performance. We grew our business 6%. The market is still very tough. The sequestration impact in our business in the US market is there, it's palpable, basically funding is down. We don't think that's going to ease up on us going forward. Perhaps there will be pockets of opportunities as we move through 2014, but certainly, in our forecast, we have basically said that the impact of the sequestration is going to be there. Not year on year getting worse, but basically, it's not going to pick up anytime soon. That's one of the forecasts that we have gone in with.

Diagnostic is rebounding and this is after a good four to five quarters of fairly depressed markets given from some of the, call it, slide recommendation changes in the US with no negative control slides, pricing pressure and so forth. We are now annualizing out of that and coming out of it, and then I think the indication of the next, last couple of months would tell us that the market is rebounding towards a good, solid, organic growth rate of somewhere between 8% to 10%, and that's our forecast going into it. We know that the unknown is obviously the impact of the potential change of reimbursement in the US and that's something we have to factor in when it comes. But fundamentally, the business is recovering and we believe that's going to continue to be fairly strong going forward.

Great. Thanks, guys. That was tremendous color. On EMG, where are we, can you just remind us on China base station, and with the tail there in terms of handset, just from a timing standpoint?

Sure. With regards to China Mobile, they've rolled out their 207,000 base stations for TD-LTE, was awarded to eight different companies, about half of it was given to Huawei and ZTE. We talked about $30 million to $35 million potential and most of that is in-house right now. What we see for a larger potential in the long-term is the 4G build out in China and that affects everything from base stations to chipsets to handsets in R&D and manufacturing. That's where we will be focusing now that we have captured the base station rollout from China Mobile, at least the 207,000 wave.

Thank you very much.

Jon Groberg, Macquarie.

A bigger picture question for maybe Bill and Ron, since you've made the announcement internally about the split up of the Company, I know you talked about some of the additional restructurings, some other costs, but have you talked about -- you've spoken with employees, what the general reaction has been, and how you think this is really going to benefit the firm going forward being the two separate entities?

I will make a comment on the LDA side, and then turn it over to Ron for the EMG side. But again, we've done a fair amount of surveying on how the employees have seen this and I believe, universally, they fully understand it. I think that the LDA team is very much engaged. We took the opportunity to simplify the Company, expand Lars' leadership and again, that is going exceedingly well. Of course, Mike's business, Chemical Analysis, has been the rock of the Company ever since we separated from HP.

From a business orientation, we will not skip a beat. You can see that in this first quarter after the announcement. The performance has been outstanding and people are very, very energized to be focused on what is seen from the outside world as a healthcare company and as part of that, part of the S&P 500. We're very pleased.

All of the corporate team, of course, is engaged in the separation. We're focusing on making the separation as efficiently as we can, as cost effectively as we can and minimize long-term dissynergies as we go forward. Early part of next year, employees will know where their final home is going to be.

But what's good about the corporate, because we are doing most of the work ourselves, all the employees or most of the employees are going to be able to find homes in either one of the two companies. So, that's going very, very well, but clearly, the excitement of Santa Rosa, California having a new, huge company up there is lots of excitement on Ron's side. I'll have Ron talk about what the view is for what was once the original Hewlett-Packard.

We've had the whole Management staff out around the globe to all the major sites for EMG and the response has been universally outstanding. People are very, very excited. These are folks that are in the EM group that have spent most of their lives actually working to try to not only maintain the number one position, but to actually go ahead and differentiate us further.

The focus on the electronic measurement customer and markets and being able to make sure that we deliver solid profitability but we also invest in the business where there's a good return on invested capital has everybody very, very excited. I couldn't be happier.

Okay, great. Lars, the 16% growth sounds like you're forecast is more in the high single-digit range. Is there anything in this quarter that we're going to come back and look at that seems a little one-time-ish in nature or easy comped from a year ago? I'm just trying to put that in context. Thanks.

It's a good question. There's always a perfect quarter where everything hits and that was certainly the case for Dako, this point in time. I'd like to draw to your attention that one of our businesses, namely the Reagent Partnership, is concentrated around larger events and larger orders that typically accumulate in and around every quarter or if you're not lucky, maybe every second quarter. From a compare point of view, I think you've got to be a little careful with that component. That growth rate for Reagent Partnership that we have highlighted here is something that won't repeat during the coming quarter.

Back to the core histology, core pathology business, I think that's a fair one because it's a run rate business. It wasn't driven by a lot of new instrumentation placement, it was really more the impact of the teams getting more seasoned and driving more content and consumables onto the platforms. The companion diagnostic business is a business growing rapid for us right now and I believe that's fair to say that we believe that's going to continue going forward. But the component of the Reagent Partnership is something you got to be a little careful with to annualize.

Thanks.

Doug Schenkel, Cowen & Company.

You did indicate that you had strong growth in the quarter within placements and upgrades with in the pharmaceutical end market. Could you just be a bit more specific on growth by product class, including specifically, mass spec and LC in general? Also, specifically where upgrade activity was most notable?

Go ahead, Lars.

I can take that. Maybe not to give you too much color on it, but it's fair to say that obviously, the top of the line in terms of our revenue growth was in our LC business and in particular, the high end of the LC 's where we saw close to a double-digit growth rate for the quarter. That's very, very encouraging news given the position we have and also how we complete in that regard.

The good news in the quarter is also that we start to see, perhaps, a bit of a backswing on the LC/MS. They had a turnaround in the quarter where we got back to a positive order growth and that's basically compared to what we had in Q3 that we had a tough year-on-year comparison. I think there would be some signs saying that, as a business, we are probably faring a little bit better. Again, I want to caution you to say that obviously the market is still tough and we don't expect to see a quick rebound of the R&D spending, but there are indications here that we are gaining share both from our LC's and LC/MS.

Okay. That is really interesting and helpful. My second question is, I guess it's fair to say, as usual, that a decent amount of growth is being derived across Life Sciences and Chemical Analysis from emerging markets. That's not all that surprising, but it seems possibly notable that others in the group have talked a little bit more about a seemingly disproportional pickup in demand from areas of Southeast Asia beyond China and also about a similar pickup in demand from South American markets.

Can you talk about whether you're seeing any of this in your businesses? To the extent that you are, is this at all attributable to maybe a favorable or more extensive commercial reach in some of these markets relative to companies competing in key instrument areas across your business? Thank you.

Yes. Again, Russia was up 22%, China 14%, India 9%, Brazil, for us, was up about 5%. Europe was actually quite strong, again, on the LDA space, at 13% growth. Again, for us, I think we're experiencing similar activities and again, we have enormous investment in capitalizing in emerging markets in BRIC companies and I think we just continue to demonstrate our ability to compete.

Great, thanks again.

Isaac Ro, Goldman Sachs.

I want to follow-up on the previous question regarding BioPharma strength. Just wondering if you could characterize for us why it is that you guys are taking share at the high-end? As I recall, you don't have a ton in the way of super new product cycles there. I'm wondering maybe if there's something in the chemistry side that's helping you succeed? Maybe there's a customer-specific dynamic? I know you guys historically have lumped the CRO industry within the drug companies. I'm just wondering if you could comment a little bit on the complexion of the share gains you're having?

Yes. I think we have an indication that we are gaining share here. Let's give us another quarter or two to really come back and verify that, but certainly, we see a turn of the corner here. You're right, it's not that we have introduced a number of new technologies or programs. They're going to come, rest assured, and obviously, we have pre-announced something very exciting that's going to hit early in 2014 and that has obviously rendered a lot of attention.

But I think what we have fundamentally done during the last 24 months, we have fixed what has been an odd and unusual thing in the life of Agilent and this is a quality issue that we had on some of our mass specs. I think we have rapidly now, obviously, improved the performance of our systems and obviously, as a consequence of that, we have gotten back to a number of customers that now really recognize the old Agilent again.

I think this is a journey of many, many small steps here, but it's really attributed to the fact that we have fixed the quality things and I think it's also fair to say that in some of the key geographies for us, we are now back in momentum again, especially in China, where the team now is gaining traction, being trained.

This is a new team during the last 24 months or 18 months and they are back in business and I think this is just building more credibility to us again. Having this foundation, I think, is going to be important for us as we move forward, early in 2014 now, start to introduce some of the new products that the market is eagerly waiting for; the 6560 Q-TOF, for example.

That's very helpful. Just a follow-up on the business with regards to the Asia region, I'm wondering if you could comment on the extent to which you saw a benefit from stimulus funds in Japan? It seems like there's been some mixed signals there as to whether, A, there's a whole lot of that money to come, whether that's already happened. Just wondering about Japan.

Secondly, on China, it seems like most companies are doing pretty well this quarter in the academic markets in China. I just wanted to confirm that's the case, and looking to see if you saw any pockets of improvement on the industrial side of your business away from the EMG stuff?

Thank you.

I'll have Mike make a comment about Japan, given he used to work there, and then have Lars maybe talk a little bit on the follow-on question?

In Japan, we've had the question, I think, in prior calls. I think we actually started seeing some movement in the order picture in this most recent quarter as a result of stimulus. We've seen an uptick in the orders. We're still not yet seeing, in the revenue side. The flipside of that, it remains a very constrained private sector marketplace. I wouldn't want to have a lot of euphoria about the overall growth rates as we move forward in FY 2014 for Japan. Clearly, the stimulus is help, but also keep in mind the currency impact, as well, which is really quite considerable in Japan. I think Lars, I'll bounce it back over to you to talk about the academia piece in China?

Yes, I'll be happy to. Actually, China is Faring very strong for us and I think that's probably true for many companies, in academia; in the clinical space, as well is in diagnostics. There is a substantial amount of money that goes into sale infrastructure, investment, and tooling up, and we see a very, very strong and robust demand for most of our technologies in Life Science.

If I look at the mass spec business, the growth rate that we have now coupled with the new team that is gaining momentum and been warming their shoes now for 18 months, it's looking very good. Our Dako pathology business is basically growing at very sizable double-digit growth rates. It's fair to say that the genomic portfolio largely into academia, and to some extent into clinical, is growing into very, very solid double-digit growth rates. When it comes academia and governmental funding in China, I still think that's a very, very robust business.

Got it. That's very helpful, guys. Thank you.

Tony Butler, Barclays Capital.

Thank you very much. Lars, if I may push back a little bit on the Pharma Biotech growth, I recognize 10% is very solid and certainly up from the 7% growth in the previous quarter. But a number of pharma companies have already announced some cost cutting measures. It does affect R&D to some degree and I just want to know, do you feel comfortable with that statement? You're going to say yes, but do you have information, some idea of backlog that is permeating through your thought process?

Moreover, specifically, in the MS side of the business, are you taking share at the level of PK or ADME/Tox where Danaher's generally been the incumbent? Are you taking share there? Or is this generally, in the proteomics piece where the Q-TOF side has really been your bread and butter?

My second question, if I may, really revolves around back to Mike and the environmental forensics business. I'd like to understand, given it was flat this quarter but down in the previous quarter quite handsomely, is this just an undulation? Is this is going to bounce around quarter-to-quarter? Can we see steady state?

Finally, Ron, one for you -- could you give us an update on where you are in interviewing for new Board members and when that might actually -- that announcement actually come to fruition? I appreciate the time.

Thank you. Lars?

Yes, maybe I start, Tony. I think that's a tough question or a pushback. I might not have all the granularity and the answers to give you here right now, but I think it's fair to say that most of the research out there would indicate that pharma should be turning the corner somewhere in '14 and going between '14 and '18 go back to a positive R&D spend.

I'm aware of some of the Company announcement that we recently have seen, yet basically, we're going in a different direction and that's a fairly sizable cutback on staffing as well as spending. But I think it's fair to say that time will tell there and I'm still optimistic that, over a longer cycle, pharma is going to be back to spending.

Again, I will have to be a little careful in terms of the share gain here and as I said before, I'd like to get another quarter or two under my belt before I can really claim that we are gaining share and in what area we are gaining share. But the facts would remain, we had two quarters now sequentially of a turn of the business where the growth rate is certainly above what the market is. I don't know what you call that, but in my book, it would smell like that we are perhaps improving our positions there. But I'd like to come back to that, perhaps, during the next earnings call, Tony, to qualify even more.

I appreciate it, Lars.

Tony, this is Mike. To answer the question around the environmental forensics, let's first of all, take a step back and describe, really, what's been going on here. It's really a tale of two cities which are in the established, more mature geographies, the United States and Europe, the government spending story here has had a huge impact on constrained spending in the environmental sector, as well as the forensic sector.

Different story in the emerging countries, such as China. In fact, I was just down in Brazil last week and they're making major investments in the area of homeland security and forensic analysis in the uptick to the major sporting events they have coming in that country, for example. The problem has been, in terms of the overall growth rate in the sector, is that the strength in those countries and those geographies that I highlighted, it has not been enough to offset the weakness we've seen in the other, more established markets. If there's a silver lining here, as we move into FY 2014, we'll be going off a lower base relative to the impacts on constrained government spending. I think you can see perhaps a more stable kind of outlook as we move into FY 2014.

Thank you, Mike.

The last question, Tony, that you had with regard to Board members, we've had very good interest from folks throughout industry and throughout the community to participate on the Board. We're working with the top search firm, so I'm working closely with the Chairman of the Board of Agilent and the Board will be in place in plenty of time before we split off.

Thank you.

Paul Knight, Janney Capital Markets.

Didier, could you talk about -- there's this dissynergy, how much is in the 2014 guidance and just refresh us there?

Sure. The way we will report is most of the expenses that we are incurring in 2014 are really one-time separation costs or the kind of expenses we are incurring to be prepared for the separation. The $100 million I talked about, they are of that category and they will be pro forma. We will start incurring dissynergy, we'll start facing dissynergy in 2015, that's in early November of 2014, as we start operating as two separate legal entities, publicly traded.

As Bill mentioned last time, they will be to the tune of $50 million in 2015 and another $50 million in the ongoing two years. We're talking about $100 million over a three years period of time that starts at separation. Before separation, the expenses will be pro forma and they are the type of either one type or just getting ready for the separation.

As I said in the last call, just as a ballpark for 2015, $50 million of dissynergy, roughly $20 million to Electronic Measurement, $30 million to Agilent.

Okay. Ron, on the electronic test side, I think you're claiming you're taking share; specifically, you think you're taking share in PXI?

We're smaller in PXI as we were relatively new entrant to that market, but our PXI growth was over 40%, our PXI and AXIE growth for the entire year. We are growing rapidly, gaining great momentum, but we also have a long way to go.

Okay. Soon Chai must be executing on the cost structure of the organization?

Soon Chai and certainly, Henrik, who is working on the LDA side, absolutely, both of them are doing wonders.

Soon Chai is focusing 100% on the Electronic Measurement now with Ron, took on the responsibilities of CIO, as well as procurement and then Henrik now has taken over all the responsibility for not only instrument manufacturing at Agilent, but also for all of the reagent manufacturing. Again, we're really simplifying, trying to leverage expertise across the organization, and they will not drop a dollar in terms of the handoff from Soon Chai to Henrik to drive the $100 million improvement in manufacturing costs; $40 million of it is again targeted, is in part of our 2014 plan.

Okay, thank you.

Dan Arias, UBS.

Mike, I wanted to ask about pricing on the GC/MS market, the new product introductions there, one from your competitor, I think, you're targeting a lower price point. Are you getting an ASP change in the market there at all?

Dan, thanks for the question. Relative to the GC/MS overall business, I think we've highlighted, in previous calls, that we have seen a level of pricing pressure and discounting there. Two things that have happened, actually, put us in a very strong position.

First of all, overall, we've seen stabilization return to the market, so our pricing and discount levels were very consistent with prior quarters. As I mentioned earlier, we're really starting to see the impact of the new product introduction. You may recall we introduced 5977 MSD product, which actually won the product of the year award at a recent Gulf Coast event and we're seeing our ASPs on those product, as well as new introduction of our Triple Quad really puts us at a strong pricing position.

We've been able to hold our own in these markets. It's a very competitive market, but, as an acknowledged leader in this space, we are often the target. But as we continue to bring very innovative, new products to market coupled with our workflow solutions emphasis it's really proving to be a strong value proposition to our customers.

Okay, thanks and then just, Didier, thinking about next year, could you just clarify or comment on what, if anything, you see has the potential for having, as you progress with the split, some level of inefficiencies just from the two businesses not being as close to each other as they once have been?

We have a really, really tough time hearing you.

Could you reask the question again, please?

Sorry about that, I'm on a cell phone. I was just curious whether you think next year as you progress with the split, you do see some level of inefficiency from the two businesses not being together, just given that you had talked about there being some benefit from them being next to each other?

So, do we see some level of inefficiencies coming from the early separation?

Yes.

I wouldn't call that really inefficiencies there, at all. I think we're working extremely effectively to be able to operate the clean separation internally, first, as we all operate under one single roof, which is Agilent, as early as August of 2014. But there will be some expenses that we will incur to ensure that we are ready for the November, early November, full separation.

But, so far, what we have been able to see as we are signing employees to either one or the other organization, first they are not moving, they are still keeping the plane flying during all this time. Second, we're seeing that we're going to be able to staff both organizations at this point in time without adding additional resources versus what we already have.

So far, it looks very, very good and the incremental resources, if any, will be at much lower level and probably low-cost jurisdictions. We are comfortable with the guidance we had provided of $50 million dissynergies next year, $20 million for EM and $30 million for LDA.

Coupled with that is we are taking the opportunity in the LDA or the new Agilent is to review every business function in the Company. You've already seen the consolidations we've made in groups, the consolidations that we're making in order fulfillment. While we may lose some of the leverage we have with EM, we're also going to make it up by simplifying the structure of the Company as we move forward and really reevaluating every task that we have in the businesses.

I am very, very confident that we are going to minimize any disadvantages. I actually think long-term that we will be able to eliminate all the dissynergies that come about after the launch, actually, quite quickly.

Okay. Thank you.

Amit Bhalla, Citigroup.

Bill, you mentioned in the past about boosting the LDA business through M&A. I was wondering if you could give us an update on what you're seeing in terms of the pipeline timing and size?

Regarding M&A?

Correct.

As I said in my notes and I said last quarter, our focus right now is to drive the organic growth rate above market. We have historically been an organic growth company. We made two very large strategic acquisitions to give us breadth in terms of inside the lab and entry into the diagnostics market; very, very pleased with both acquisitions and what it's brought to the Company.

Outside of the comments I've made in the past is that, I wish we had a sequencer, that we are very well-positioned to compete against anybody in the markets that we have targeted going forward. Our focus this year is all about, as I had noted, organic growth rate above market and to drive the margin expansion. We drive the margin expansion, and I've been very clear we should be above 20% operating profit as we go forward, and again, we're targeting midpoint next year or this year to be at 19.5% and that's really what's going to drive our return on invested capital.

Return on invested capital, the new Agilent moving forward is going to be around 11%. Yet, good news is our cost of capital in the new Company will be lower, but we need to be able to drive that up. If we can drive this margin expansion, we'll pick up two additional ROIC points per year. That is where our focus.

We continue to look for technology add-ons, but we are very, very happy with our existing portfolio of products. As we have indicated, it's all hands on deck right now to get this Company separated and launch Ron's team to be just an incredibly competitive Company in the outside. Again, we have no plans for any type of large acquisition as we stand today.

A quick follow-up on oscilloscopes -- I don't know if I missed it, but you mentioned the highest order quarter in oscilloscopes this time around. Can you just talk about the competitive landscape or did you introduce anything new in the product side? Why such a big jump in oscilloscopes? Thanks.

Sure. Our oscilloscope orders, as I mentioned, the real-time oscilloscopes, which is the bulk of the oscilloscopes outside of fiber, hit a record high. We had double-digit growth in scopes overall for the quarter for orders. If you look at the high performance part of the market, we believe, and again, this is hard to determine because everything is not reported publicly, but all of our intelligence shows us as number one in the market in high-performance oscilloscopes and number two in the market overall. We have done a great job at the high-end and as you look at the midrange, as well as the lower end, we have exciting things that will be coming. We're making great progress across the line, but we will be coming out with new, exciting things during the next year.

Thanks a lot.

Patrick Newton, Stifel.

If we take a look at your initial annual guidance for fiscal '12 and '13, you generally had a lower expectation of the year progressed and clearly, there were macro and market dynamics that changed throughout the year. My question is, as a result of the last two years, have you changed your guidance methodology or provided a more conservative outlook for fiscal year 2014 or is your methodology relatively unchanged?

The methodology is relatively unchanged. As Didier said in the call, the big issue is what is the second half of 2014 going to look like? The conventional wisdom is that we're going to get some economic growth in the second half, which really, then, will drive the Electronic Measurements business for Ron.

But our methodology is the same. We give the range, the top end of that range, of course, is the commitment the Management team has made and then we downgrade that to make sure that we don't set false expectations. But we have not changed our basic methodology at all.

All right. Thank you, Bill. Ron, one for you, you talked a little bit about modular instrumentation, and I believe you said 40% year-over-year growth. Can you help us understand where that stands on a revenue basis, and also where wireless manufacturing stands on a revenue basis in the current quarter?

Sure. The overall wireless manufacturing numbers, we actually report that for the quarter, and for instance, it was $124 million for EMG. We do not report it for modular or the sub-segments with regard to revenue in that place. But this new solution that I talked about that we announced earlier this week, this new wireless manufacturing test solution is a modular solution and this modular solution can test Bluetooth, any wireless LAN, and any cellular devices up to the absolute latest standards. They are very fast. They can test 4 devices up to 32 devices, so they're extremely competitive and our competitive position is dramatically increasing in that space. We expect our growth to continue very strongly.

Could that lead to perhaps some share gains in wireless manufacturing?

Yes.

Okay. Just one clarification, I may have heard this incorrectly, but was guidance for EMG operating margin in Q1 for 15.5%?

Yes.

Can you help me understand that? Because guidance revenue is only going down about 2.5% at the midpoint. You just put up a 19% up margin quarter and you even did a 17.3% on lower revenue in Q1 '13. So if you could, kind of walk us through the bridge there, that would be very helpful.

Let me take that one. But first, note that this is a significant improvement from where EM used to be. Even after all of the restructuring that EM has done in 2009, basically we said that $600 million in revenue we would reach 12% operating margin, now we're talking 15.5%, albeit on a little bit higher revenue, but also after three or four years of inflation and things like that.

But the comment that I will make, applies not just to EM but for all of Agilent and I've probably stated those in my script. We are from Q4 to Q1, for example, we're seeing a $20 million increase in stock-based compensation, only because the stock -based compensation is always, the recognition is higher in the first quarter of every fiscal year. We're also seeing about $9 million increase due to two months of salary increase and the corresponding adjustments to our vacation accrual, which is $6 million.

We are seeing about $6 million increase in payroll taxes because we pay, in Q1 for example, all of the variable pay corresponding to the second half of 2013. You have all those elements that don't just impact EM, it impacts all of Agilent and explains why it year after year after year, Q1 operating margin and Q1 EPS is significantly lower than Q4.

And for the year, for EM, we have forecasted 19.5% operating margin on 3.2% growth.

All right. Thank you for taking my questions, good luck.

Derik De Bruin, Bank of America.

In 2014, do you need to do any additional R&D catch-up spending, or can you still look about 3% growth in R&D?

I'm not sure I understood -- can you repeat the question please?

Basically, I'm just looking and seeing if you have to any additional spending in R&D in 2014? Have you been conservative on your R&D spend over the last couple of years given the difficulty of the market? Do you have to do any additional catch-up spending or are you still going to see -- I'm just looking at the level of R&D growth year-over-year?

At least from my perspective, is that I think that some of the R&D slowdown was just because our variable pay had gone down as a result of the lower performance, the lower return on invested capital, as a result of the Dako acquisition. But overall, we don't see a fundamental change to our R&D portfolio outside of the stock and salary adjustments that Didier outlined.

Great. You mentioned some strength in your legacy genomics business, I'm just wondering if you could do a little bit more color on that?

Lars?

In terms of the overall growth rate, you mean? Got it. Thanks for asking the question. I was just waiting for it. Actually it's a couple things I want to highlight, the Clinical segment, which is obviously gaining importance for genomics, grew 12% year-on-year. Actually, it's led by what we see in aCGH, which is actually traveling on pretty nicely. We see a continued penetration of the array into PGD and PGS prenatal testing and cancer diagnostics, so that's faring very well.

I think the Nimblegen account conversion has actually hit very, very nicely. In terms of instrumentation and consumables that are following through that, we have actually hit all the targets and actually believe we are going to have a nice rollout of that, also into 2014. The bioanalyzer business and the tape station is talking on very, very solid growth rates, double-digit growth rates. Obviously, this is all into the next-generation sequencing markets, gene expression, labs and so forth, pharma, biotech, so that's faring very well.

I think the question that you ought to ask is obviously, what happens with the FISH business. I'm happy to say that the FISH business the last quarter grew by 23%, so we're starting to see traction on it, albeit from a very base, but I'd like to draw your attention to a few things which is very, very significant here. We just this week announced or actually today or yesterday announced a couple new breakaway probes, the ALK, ROS, and RET, which are going to be really, really great toolkits for both the cytogenetics sales force as well as the Dako sales force.

On top of it, we're going to market, as a stand-alone product, also, a fast hybridization buffer that brings down the overall test time from test results from two days, 48 hours, to down to a couple of hours or half a day. From an overall diagnostic capability point of view, this is actually looking very nicely.

Overall, I think we have gained traction in the overall genomic legacy business and we see a continued growth and expansion of the growth rate also going into 2014. Target enrichment, which is the same sequencing play we have today is faring on very nicely with the growth rate of 30% value wise. Obviously, volume even higher and we expect that to continue. But back to Bill's comment, if we one day had a full sequencing solution, that would be even better, so we are obviously hard at work at that.

Great, thank you very much for the color.

Dan Leonard, Leerink Swann.

This Justin on for Dan. Could you comment on the tenor of academic life science and research budgets in Europe, specifically the Western markets? Maybe compare that to how it felt versus last year?

Given Lars lives in Europe, I have a comment about that, but as I've noted in the past, our academic and research has been down for so many quarters in a row, we finally had to hit the asymptote of the bottom and the good news is, this quarter may have been the beginning of at least a positive trend. Lars?

We do see and again, I'm cautiously optimistic here because obviously Europe in terms of all the austerity measures are not through the funnel yet. But I do see a couple of more brighter clouds in the skies and these are more investment that goes in to government than academia research. You see pockets of initiatives, whether that is in France or in Spain where you, for the first time in many, many years, are actually able to see a net increase being communicated for spending in the arena in 2014 and beyond. I still think it's fair to say that Europe still will be a tough market and we won't have a lot of help from new funding, but again, in my book, it's not going to get worse and that, by itself, is pretty good news.

Great news. I know this is just a tiny sliver of the overall portfolio, but just kind of your perspective on the microarray market and is that stabilized? Do think it's growing again? I missed the overall growth number in China?

Lars, why don't you go ahead and mention about the microarray?

Yes, I can take the microarray business. Obviously, it's, if I look and add, for the various players in the field and I add their report outs for the last quarter, it would indicate that basically the total arrays are down, the gene expression arrays are down.

The good news here is, we are seeing growth, actually. Not a very strong double-digit growth rate, but we are holding our line and that would indicate that we are actually holding share, pretty nicely and even gaining share. If I look at the last company's reporting, either Illumina or Affymetrix, they basically had a rough time. But our business is holding up pretty nicely here.

The LDA China growth rate was 14%.

All right, great, thank you.

Thank you and that concludes our question and answer session for today. I would like to turn the conference back to Alicia Rodriguez for any concluding remarks.

Thank you, Karen. I just would like to thank everybody for joining us on the call today. Definitely, if you have any questions, please give us a call in investor relations. Have a good day, goodbye.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program and you may now disconnect. Everyone, have a good evening.