安捷倫 (A) 2014 Q1 法說會逐字稿

Good afternoon. My name is Toni and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2014 Agilent Technologies Incorporated earnings conference call.

(Operator Instructions)

Thank you. Alicia Rodriguez, you may begin your conference.

Thank you, Toni. Thank you, and welcome everyone, to Agilent's first-quarter conference call for FY14.

With me are Bill Sullivan, Agilent's President and CEO; Ron Nersesian, CEO of Keysight Technologies, and Didier Hirsch, Agilent's Senior Vice President and CFO. Joining in the Q&A after Didier's comments will be the Presidents of our Chemical Analysis and Life Sciences and Diagnostic Groups, Mike McMullen and Fred Strohmeier. Also joining from Keysight will be Neil Dougherty, CFO, and Guy Sene, Senior Vice President of R&D and Sales.

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.

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.

Before turning the call over to Bill, I would like to remind you that Agilent will host its annual analyst meeting in New York City on March 6. Details about the meeting and webcast will be available on the Agilent investor website, two weeks prior to that date. Now, I'd like to turn the call over to Bill.

Thanks Alicia, and hello, everyone. Today, Agilent reported first-quarter orders of $1.68 billion, down 2% from last year, and flat on a core basis. Q1 revenues of $1.68 billion were unchanged from a year ago, up 1% on a core basis. While revenues came in at the low end of guidance, adjusted earnings of $0.67 per share were at the high end of the guidance, up 8% from a year ago. Operating margin was 17.6%.

We saw a mixed business environment, with continued steady growth in life science and applied markets. This was offset by continued weakness in our electronic measurement markets, particularly in aerospace and defense. Despite some ongoing economic headwinds, we continue to benefit from our commitment to manage expenses and reduce manufacturing costs.

We also continued to make excellent progress in preparing for the split of the company. On January 7, we announced Keysight Technologies as the name of the new EM company. We expect the separation to be completed by early November.

As I indicated last quarter, Agilent will increasingly differentiate our electronic measurement and LDA businesses in preparation for the Company's separation. Today, I will share performance highlights for the life science, diagnostics, and applied markets. These businesses will be the focus of the new Agilent, as the Company continues under my leadership.

Following my remarks, Ron Nersesian will discuss our electronic measurement performance, which will be focus of the new spin-off company under his leadership. Finally, Didier Hirsch will provide a more detailed discussion of Agilent's overall financial results, as well as our guidance for fiscal second quarter and the full year.

Turning to LDA, our first-quarter performance continued to show solid revenue growth across instruments, services, and consumables. Q1 revenues of $1 billion increased 5% year over year, reflecting strength across most end markets and a healthy Q4 backlog.

Q1 orders of $979 million increased 2% over last year, where slowing in the order growth is driven by weaker demand in academic and government markets. Operating margins were up 210 basis points to 19.2%, consistent with our margin expansion goals for the businesses. We continue to focus on attractive end markets, a leading product portfolio, and significant operational leverage.

Our end-market performance in LDA was particularly strong in pharmaceutical, biotech, clinical, food and forensics. Pharma revenue grew 8% year over year, with strength in Europe and Japan offsetting slow demand in the US

Food revenues were up 14% over last year, as globalization of the industry continues to drive demands for food safety. Forensics grew 26%, driven by the need to identify and characterize new designer drugs entering the global market, and energy was up 3%, led by Europe, and a large refinery projects in the Middle East.

Conversely, academic and government markets declined 10% year over year. Research spending remains constrained, impacted by slow budget releases, particularly in the US and China. Diagnostics and clinical revenues were up 10%. The pathology business was slowed to a very slow start for the quarter, but the clinical business was robust, driven by CGH arrays and target enrichment.

On a regional basis, LDA performance was mixed. Europe continued to see the strongest regional performance, driven by strength in pharma and services. Asia, ex-Japan, also showed strong growth, while Japan was down, primarily due to weak currency. Americas was up slightly, constrained by delayed budget releases in Canada and the United States.

Within LDA, our life science and diagnostic group, or LDG, had Q1 revenues of $592 million, up 5% from a year ago. Orders of $564 million were flat over year over year, reflecting softer instrument demand in the Americas and China. Operating margin was 17%.

We signed a new companion diagnostics agreement with Merck and Amgen. Development projects will include treatments for lung, breast, and gastric cancer. And LDG released the third version of our intelligence system emulation technology for our 1290 Infinity LC systems. The new ISET allows for emulation of competitor systems.

Our chemical analysis business continued to show strength across both its instruments and recurring revenue portfolios. Q1 revenue grew 6% to $417 million, driven by chemical and energy, as well as non-government food safety markets. Q1 orders grew 4% to $412 million.(sic-see presentation slides "$415 million") Operating margin was 23%.

In the quarter, chemical analysis launched two spectroscopy systems, the new ICP-MS and MP-AES systems introduced more streamlined operational features, and a user-friendly interface. This will enable a wider range of applications, and improve accessibility to a broader range of lab personnel.

LDA's outlook for FY14 remains positive, as the world economy continues to improve, and budgets are settled. While comparisons will get more difficult starting in Q2, we expect growth trends to continue. Our gross margin improvement initiatives continue to progress well, and we see additional opportunities to grow share with new product releases in the pipeline. 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 second fiscal quarter of FY14 are expected to be between $995 million to $1.02 billion, or 4.1% core growth at the midpoint. We expect operating margins at the midpoint of 18.1%. For the full year, we project a revenue range for LDA of $4.03 billion to $4.13 billion. At the midpoint, LDA's operating margin is expected to be 19.5%. Didier will provide additional details in his commentary.

Thank you for being on the call. Now I turn it over to Ron to talk about the electronic measurement business.

Thank you Bill, and hello, everyone. For the first quarter, the electronic measurement group reported orders of $699 million, down 7% year over year. EMG revenues also declined 7% in the quarter, to $671 million.

While orders were consistent with expectations, the impact of lunar new year on our ability to recognize revenue late in the quarter was greater than anticipated. This resulted in revenues that were below our guidance. The book to bill ratio was 1.04, for the quarter. Despite lower than expected revenues, solid gross margin management and discipline expense control yielded an operating margin of 15.2%.

Taking a closer look at our end market performance, aerospace and defense revenue declined 27% year over year, against a tough compare. The first quarter of FY13 was the peak of our aerospace and defense business, prior to US sequestration budget reductions.

Consistent with the positive signals that I noted last quarter, industrial, computers and semiconductor revenue increased 4% year over year, driven by investments in next-generation semiconductor process technologies. Communications revenue declined 5% year over year, due to softness in wireless R&D, and broadband spending. Wireless manufacturing was up 1% year over year.

Long-term growth drivers remain intact. Wireless standards continue to evolve, driving investment in emerging network technologies. As a result of two key product introductions, EMG is well-positioned to capitalize on these macro trends. As I have said before, we are committed to winning in the wireless ecosystem. In November, we introduced a new modular wireless manufacturing test platform, called EXM. It is getting strong reviews for both cellular and wireless LAN tests, and just two weeks ago, we introduced a major new wireless R&D platform called UXM. Both the manufacturing and R&D platforms have multi-format architectures to support 4G standards, and can be upgraded as standards evolve.

Another key part of our product strategy is to build a modular product offering, that leverages our technology leadership in feature-rich instrumentation. Our modular business continues to gain momentum, with orders for PXI and AXIe offerings again showing strong double digit growth in Q1.

Shifting from Q1 results, we remain focused on our FY14 priorities, which are: to launch ourself as an independent company, focused solely on electronic measurement customers, to strengthen our position in wireless communications and modular solutions, and to continue to generate strong profit margins for our shareholders. As Bill commented about the split, I am pleased to report that we continue to make excellent progress, and remain on track to separate EMG from Agilent.

On January 7, we announced the name of our new company as Keysight Technologies. As we plan to begin operating under the Keysight Technologies name, as a subsidiary of Agilent, effective August 1, the spin off is expected to occur in November. Despite the extensive work involved with the separation, we remain intensely focused on managing our business without interruption, and delivering the quality, innovation, and service that our customers deserve and expect.

Turning to our outlook for Q2, Keysight revenues are expected to be in the range of $705 million to $745 million. We expect operating margins at the midpoint to be 18.2%. With expected growth of approximately 8% in the second half of FY14, revenues are now expected to be in the range of $2.84 billion to $3.0 billion, or 2% core growth at the mid point for FY14. We expect operating margins at the midpoint to be 18.7%. I will now turn it over to Didier, to provide more details on Agilent's financial results.

Thank you, Ron, and hello, everyone. To recap the quarter, our revenue adjusted for $5 million of unfavorable currency, with $6 million or 0.4% below the midpoint of our guidance, but our EPS was $0.01 over. Once again, we were able to deliver on our EPS commitment, thanks to our disciplined management of expenses, in line with our operating model.

Please note that Q1 core revenue growth by segment and by geography is reported in a slide deck posted on our website. This quarter, currency subtracted about 1.5 percentage points from our year over year revenue growth, and acquisitions had no material impact. A final note on Q1, we bought back $100 million of stock in Q1 and therefore completed the $1 billion stock repurchase program authorized by the Board in May of 2013.

I will now turn to the guidance for our second quarter. We expect Q2 revenues of $1.72 billion to $1.74 billion, and EPS of $0.71 to $0.73. At midpoint, revenue will grow 1% on a core basis.

Our 18.2% projected operating margin at midpoint will be 60 basis points higher than in Q1, and 110 basis points lower than Q2 of last year. Remember that we initiated a drastic cut in discretionary expenses early February of last year, that resulted in over $30 million of expense savings in Q2 last year, so we face a tough compare. While we are maintaining our spending discipline, we are also investing in key growth initiatives.

Now to the revised guidance for FY14. We are now expecting FY14 revenues to range from $6.9 billion to $7.1 billion, and at midpoint this translates into 3.6% core revenue growth.

As stated by Ron, EMG has revised down its midpoint revenue guidance by $55 million, to a year over year core growth of 2%. Midpoint operating profit guidance at EMG has been reduced by $35 million, and operating margin guidance at midpoint is 18.7%.

At the same time, LDA has increased its midpoint revenue guidance by $5 million to a year over year core growth of 5%. Midpoint operating profit guidance is increased by $4 million, leading to an operating margin midpoint of 19.5%.

Agilent's EPS is now projected to range from $2.96 to $3.16, and the midpoint of $3.06 is down $0.12 from the November guidance, which represents a reduction of $0.13 coming from EMG, offset by an increase of $0.01 from LDA. With that, I'll turn it over to Alicia for the Q&A.

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

(Operator Instructions)

And your first question comes from the line of Tycho Peterson from JPMorgan.

Just trying to walk through the math on guidance. You know you cut revenues by $50 million. If you assume maybe 50% decremental then you are talking $25 million to EBIT or $0.06.

Why are you cutting the bottom line so much? Can you talk about why you don't have additional leverage you can call to offset some of the impact on earnings?

Thank you. This is Didier. As I mentioned, the $55 million revenue decline for EM triggers a $35 million operating profit decline, and I will let Ron talk about the incremental/decremental.

With regard to the decremental, we've looked at that closely, and we are anticipating growth of 8% in the second half. And accordingly we are continuing to invest to bring out new platforms that we think will drive that growth in the second half.

And just a follow-up, Ron, in your comments you talked about delays from the Chinese New Year. Can you maybe just talk as to whether things picked up post the quarter and do you expect those delays to come through in the first half?

Sure. Our orders were right on expectation, at $699 million. What happened was, we built about $15 million in pipeline, due to lunar new year.

So this is basically products that we received orders for, we shipped, but were not able to recognize revenue because of the way the lunar new year fell. We anticipated and forecasted that to a certain extent, but it was greater than what we thought. We plan to flush that $15 million worth of backlog in Q2, as well as have a sequential increase of $39 million, to bring our revenue up $54 million in Q2.

Okay. I'll hop back into queue. Thanks.

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

Ron, could you elaborate a little more just on the puts and takes to EMG guidance take down? What are you factoring for the aerospace and defense business, and if you could give us a view around the coms segment, that would be helpful.

Sure. For the aerospace-defense segment, that is the biggest segment that really is driving the change.

We had expected that to be flat, and it actually was down 27% because of the tough compare. So in particular, for the year, we are moving it from flat for the year to down 5%.

The coms business, we were forecasting 3% growth before, and now for the year 2% growth. And computer -- industrial computer and semi, we were forecasting 5% growth and we still are. And that business has been turning, especially in the semiconductor space.

So the decline is basically driven in the aerospace-defense spending. Even though that the budget was approved in December it's been a slow start. We have seen more acceleration towards the end of Q1 on quote activity, and orders start to pick up, but we do believe that there is a bit of a lag in that recovery.

Any chance you can give us a view around the orders within EMG by division?

No. We normally don't report that for competitive purposes.

All right. Thanks.

Your next question comes from the line of Paul Knight from Janney Capital.

Could you talk about the -- I guess the PXI, and the dynamics surrounding PXI, versus the box business. Double-digit PXI would suggest you are, I guess, keeping share.

But is the market on the box side coming down? And so can you talk a little bit about share versus -- and also the dynamics of box versus PXI?

Sure. The box business is much greater than the PXI or the modular business, and it continues to be so. But we are building our modular offering, because that provides advantages for certain customers.

Our modular business is relatively small, and it continues to grow. We have stated that it's roughly $100 million in the past.

Last quarter, we saw approximately 50% growth, and this quarter, it was well into double digits, getting close to that same 50% number. So we are seeing traction.

At first, we bought out some of the infrastructure products, and now, we're coming out with core RF and wireless products to go forward. As a matter of fact, the platform that we have for manufacturing is a modular platform, that we just introduced.

And the reviews on that product are very good. We're very pleased with it.

Where do you think market share is? Any change?

Is there a gain? Is there a loss? What's your thought there?

We are definitely gaining share in the PXI market. There is no doubt about that I believe our growth is quicker at roughly 50% the last two quarters, but we will continue to work on that. That is a multi-year strategy that we will continue to drive over the next five-plus years, until we're number.

Okay. Thank you.

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

On the economic budget, Bill, I wanted to ask a little bit about your comments there. It seemed like across the rest of the industry in life sciences, there were decent fourth-quarter budget flushes. So if you can give color beyond the geographic comments you made there, that will be helpful.

I will make a comment about China, which has been more difficult, and turn it over to Fred to talk about the US. Again, a lot of these is who your customer base is, and exactly where you are in the process.

Clearly in China, they are -- our belief in January was a slow down in terms of commitments in academic and research, and that was impacted by the lunar new year. So I don't think that we're going to get a really solid feel to exactly where our position will be in academic and research until Q2.

I will let Fred comment about the US, which is obviously the large market.

If you look to the NIH product, which is representative of a larger piece of the spending, you see that this is below the spending of 2012. and if you look to the [cabin] of things which are sold at the moment, is that there is some hesitation to spend the money on instrumentation, and rather on services and consumer goods. And this is the situation, as we see it at the moment.

I will put my editorial, and again, not to make an excuse but every time lunar new year is in our January for our Q1, we have a lot of anomalies that are difficult, and fortunately only shows up every three or four years. But if you go back over that period of time, it is always an interesting quarter to describe, when we have this event.

Got it. That's helpful. A follow-up if I could, on Dako. I don't think I heard it, but if you can give the growth in the quarter there, that would be great.

And curious if you had any updated views regarding long-term strategy here, and the economic business in there, along with diagnostics. And wondering if we might see meaningful updates to the strategy for that combined asset base, before the deal closes. Thank you.

Again we combined the two organizations, between the clinical and our pathology. We're absolutely convinced our array CGH business, as well as our target enrichment is going, and we had a very robust growth rate.

But we did have a slow quarter versus our Q4. I will have Fred make a couple comments about the pathology specifically, and any other color commentary regarding genomics.

The pathology business, as Bill said, was indeed a bit weak. We have put in a lot of orders in the Q4 of last year. That was one effect.

If you look to the first quarter of FY13 this also was impacted by an artifact, so that at the moment, Q1 looks a bit low. I think we believe the demand for pathology is pretty robust, and in particular, as Bill mentioned, we see a lot -- particularly in the clinical space.

I think the microarrays are outgrowing by far. At the moment our competitors, SureFISH is making inroads into the market. And by the way, also, the microfluidics business is growing double digit, mid-double digit, this together gives a good footprint in the clinical space, with the genomics products we are providing.

Got it. Thank you.

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

I guess I am still struggling a little bit in some of the deltas for the quarter, particularly as we look at aerospace and defense. We sort of came in here, as you said Ron, we were flat, and now we are down 5 but we just had a down 27, when I think, last quarter we were down about 11. It was a pretty big deterioration.

I am just trying to get a sense for how something like that is so difficult to forecast, or did it come in closer to where your forecast is, and then the comps will drive it better? I am just not sure I totally understand.

I know the lunar new year, and some of the other factors. I am just trying to see what transpired, maybe, from a pacing perspective to where it was so difficult to sort out?

Sure. Our forecast was to exceed the mid range of the guidance, all the way up towards the end of the quarter.

And right near the middle of January, the middle to second half of January, we received a very substantial number of requests to delay delivery until after Chinese New Year. That happens in China. We also saw some of that in other areas.

In aerospace defense, the budget was signed in December, but at first what was happening, the end-users didn't know how much money they were going to get, because it wasn't passed out to them. We actually saw a nice acceleration in aerospace-defense at the end, right at the end of the quarter, but obviously that did not translate into revenue.

And don't forget that Q1 2013 was the largest quarter that we had in over eight quarters, where in Q4 of 2012, people were placing the last orders before sequestration, and then we shipped that, about $195 million, in Q1 of 2013. So we had a very high compare on that standpoint. So aerospace-defense, basically it was a very slow start to spending the money that picked up near the end of the quarter, and then at China, we saw some push-outs and two orders alone accounted for $11 million worth of the delta.

Okay. On the guide, the two things that are sort of perplexing to me, or I would say three.

One, it seems like some of the issues we had were temporal and there are some assumptions of improvement, and yet the guide, it doesn't feel as if reflects all of that. It seems as if you took it down at least on the revenue side by more than the delta. So I am a little bit confused there.

And then on the drop down, again, to Tycho's point, it seems like the decrementals are pretty substantial, just relative to the revenue change. Was there any thought process to maybe doing more on the cost side? I know it's always tough, but we're looking at an earnings picture here that's similar to where we were four years ago.

So it's been a pretty frustrating, I know, period. But I guess just trying to sense the temporal versus structural natures of some of this, because the guidance implies some of it's temporal and some of it's not. I am trying to sort out how you thought through that.

From an Agilent perspective, the thinking was very straightforward. The recovery in our electronic measurement or Keysight was in the second half of the year. That was the assumption of the guidance.

We had a difficult Q1 to interpret, so we're going into Q2 with, quite frankly, a fair amount of uncertainty, because of the issues that Ron outlined very well. So the question comes in is, if we don't change the guidance, then the second half recovery is just enormous. And I think that would set wrong expectations.

So we said, if Q2 is what we think it's going to be, then the second half snap back can't make up the difference from the first half. So that's logic number one, and I hope we're wrong, but that's the logic path that we went in.

On the expense side, we are in a big catch-22. We have to win in modules. We have to win in communication.

We've got to get these new products out. LDA has a whole string of products, and so to take draconian expense cuts, given this uncertainty that we have, also I don't think is the right answer. And so we made those two trade-offs moving forward, and tried to lay out to our investors the best we can what we think will happen, given the problems that we had in Q1 in electronic measurement, and the continued uncertainty going forward.

Okay. And just one follow up. What about on the repo side?

You've obviously got some flexibility. Stock will be down, I don't know 5%, I think it's over that now.

How much consideration, I know there was a lot of sort of hesitance to do that before the split. How much will the volatility in what we're seeing here, if you do believe somewhat in the recovery thesis, how much does that push you to have to consider ramping that up a bit?

Well we have been authorized by the Board to have maintain our share count. I believe it's 335 million.

335 million. And this quarter we're actually at 338 million. So yes, we have the cash available, and yes, we have the authorization to continue to make stock repurchases.

All right. Thank you.

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

Let me just make sure that I understand, just to follow up on Ross' question. The surprises in the quarter were really two-fold.

One being the lunar new year push-outs, and one being the weakness in the aerospace and defense market. Is that correct?

Yes. In the short term, the lunar new year had a $15 million effect, and we were $19 million off the center of guidance, and $9 million off the low end of the range. And the aerospace defense picture we believe will be slower recovery than we had anticipated before.

Okay, and I guess Ron, the question then that I think you mentioned, that your orders were actually in line with expectations. I am just trying to square those two comments in my mind.

Yes. Orders were fine, and that means that our Q2 guidance, we could have met, if we didn't have the $15 million delays in the actual revenue recognition, or customer acceptance. Longer-term for the second half, we just think that the aerospace defense market, given its hole in Q1, and given where it's coming from, is going to be a little bit slower.

So as Bill had mentioned, we have a real hockey stick from roughly 7% decline in Q1, and we're forecasting an 8% growth in the second half. So we are expecting a significant upturn.

We've seen things like Europe. Europe has posted growth for seven months in a row. That feels good.

The semiconductor market overall feels very good. But there are other mix things that would cause us not to count on more than 8% growth in the second half.

Okay. Thank you.

Your next question comes from the line of Derik De Bruin from Bank of America Merrill Lynch.

Looking at some of your more government-exposed spending. Correct me if I am wrong, but I believe that your environmental forensics core was down 7% in Q3 2013, was flat Q4, up 7%.

Is that environmental that's rebounding there? If it is environmental, is it outside of the US? I am just curious, because that also does have government exposure to it.

Mike why don't you take that, please?

Sure, Bill. Thanks for the question, Derik. As you know, we report the combined environmental forensic numbers externally.

The story there actually, and it's a nice surprise, is the strength of the forensics business. It was up fairly significantly in Q1. A lot of it is being driven by concerns about designer drugs, and drugs abuse testing on a global basis.

Particularly, we are doing very well with various police and security authorities globally. So that's been a real area of strength for us in the first quarter.

I would tell you that in the more developed countries, particularly the United States, budgets remain quite sluggish. But I will tell you it's a different picture than it was last year, which was, we knew we were facing sequestration.

This year, we know the budgets have been restored in certain agencies, such as the EPA, but we haven't yet seen those budgets be released. Hope that gives you immediate clarity.

That's helpful. I guess can you tell us how the Omnis platform did in Dako?

Fred?

Yes. The Omnis platform is picking up, as we speak. We have shipped a couple of dozen in the last quarter.

The feedback we are getting back from our customers remains positive, and we have put a couple of new assays during the quarter on the platform, as well. We are just rolling the products out as the orders come in.

Just one final question. Have you done any more work in looking at the tax implications of the spend, and just how the tax rates are going to fall?

Yes, we have. I apologize for not answering it directly, but we will share that in the March analyst day meeting, but we are very close to determining essentially what the tax rate will be for the new Agilent moving forward, and the range for Keysight and theirs.

But please wait until March and we will have that. And I think what's important that I don't give the number now, because the Form 10 will be published right before that, and then you will get a historical perspective of what the actual tax rates have been for what the two companies had been, if they were independent.

So I think it's good to see the total answer in the context moving forward. I continue to say that we are taking the opportunity to look at ways to ensure that we have sufficient cash in the US. Obviously Keysight has to have sufficient cash in the US moving forward and so there will be some tweaking of the overall tax rate.

Great. Thank you.

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

Bill, can you, on the first quarter on the LDA side, of the life science and diagnostics, looking at the gap between order and the revenues, trying to go back in history little bit. It looks a little bit out of the ordinary from a historical perspective.

You mentioned you had demand in the US and China. Anything else that kind of stands out to you in terms of orders?

No. I think as Fred said, I mean, there is clearly a lot of orders that were pulled in to the last month of our Q4. The start-off in November was terrible. We ended in January quite fine, 7% growth rate.

But we had a terrible start to the quarter. And I don't know if we have trained all our new employees about how the compensation system works in Agilent for many decades, but nonetheless, we just had a terrible start to Q1.

Okay. What you have seen I guess --

January was fine, so basically some of the order shortfall in November got booked in October, is basically what I am saying. And we exited the quarter on the runway and we think that we're going to have solid growth as we move forward. But we did have a slow start to our Q1.

Bill could I add a little bit additional color commentary from the chemical analysis side. As you know, we have a large foot print of our businesses in Asia, so the story of the Chinese New Year really did impact us because we lost a good week or so worth of port around orders.

Back on the comments on US government spending. I know earlier we were focusing on life sciences implications of US government spending, but it also had a material impact on the results for CA in terms of the order rate coming in for the first quarter, albeit it's a much different story than it was a year ago, because budgets have been restored, and we just need to wait for them to be released.

Thanks. Then second question may be a little bit of a two-parter here. We talked about emerging markets, like they're one country. Obviously, they're all individual businesses.

Historically Agilent has had a nice strong presence there. The meeting has been less robust recently, so I guess one, how did you -- can you please give us color about how you are seeing forecasting those markets for you in the rest of your 2014?

And as you tie that into Ron's EM business, maybe help me understand what gives you confidence that you will see that 8% growth in the second half? Historically, I know there's always been a bit of a hockey stick, but talking to competitors now, everyone thinks today they're not seeing it yet, and what are the major drivers this time around? Thanks.

There is only a couple comments on the LDA side, and then turn it to Ron on the Keysight side. Again, our non-Japanese Asia business grew 8%.

Obviously China Korea was very strong for us in the quarter. India continues to struggle. I think in the Americas, Brazil has its challenges moving forward.

There are issues out there, that we have to address, but quite frankly, China just dominates the position for LDA. So as the emerging -- how China goes, that's how our emerging markets will go. Ron?

As far as emerging markets we sell in aerospace-defense to some of the emerging markets, in particular Russia, a little bit to India, and some to China. We saw those markets were soft.

As a matter of fact, if you add them, up like some other competitors have announced previously, our orders were off 16% in Q1 in the emerging markets, and again, that's an overlay with aerospace-defense in certain areas. So that's the environment that we're seeing there, which tends to correlate with the guidance that we have going forward.

The things that make us excited is when we look at the second half, Europe continues to be strong, where from the standpoint that it's grown seven months in a row, and we have two major product platforms that will start shipping in the second half. One is the wireless manufacturing platform, which is a modular based platform that's getting excellent reviews, and the latest is the new one that we just announced a couple weeks ago, which is a new wireless R&D platform.

Just to give you an idea, this platform is the latest and greatest. It's up there, and customers have been giving us reviews, saying it's the best platform that exists on the market.

It handles LTE advanced and the category 6 data rates up to 300 megabits, does carrier aggregations. All the latest things, and it has integrated fading, which is typically something that someone would have to buy a Spirent product and hook it up with their wireless product, in order to make the solution happen.

So when we take a look at the strength of the product, the feedback that we've had in these areas, how Europe has turned around, and also how things are starting to pick up in some other areas, that gives us confidence for the second half.

Thanks a lot. Hopefully the weather lets you get in here in March for your analyst day.

(Operator Instructions)

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

Ron, one question, or one clarification. You sized your PXI business at roughly $100 million. I am curious if that's a trailing 12-month basis, or is that from annualizing current quarterly results.

That's from a trailing 12 months, and that's for PXI, AXIE, modular business, the total modular business.

Okay, great. And then I guess I was curious when you talked about kind of the drivers for the engine in the second half, you didn't mention necessarily the Chinese opportunity and you didn't really mention wireless test directly. I guess you did talk about your two major product lines.

So I'm curious can you update us on timing or opportunity with China Mobile? I think you previously sized that at a $30 million annual opportunity, and can you talk about wireless test and expectations there?

Sure. There is no doubt with our new platform that's coming out we are gaining momentum.

If you look at two areas where we probably had the biggest product holds on a competitive basis, it was in the wireless manufacturing and wireless R&D platforms. And where we have really come a very long way in those areas, within the past year.

With regard to China Mobile for the TDD, LTE spectrum, it was awarded to all three players ahead of schedule. Commercial licenses have been issued, and China Mobile plans to put in place 500,000 LTE base stations in 340 Chinese cities, and we are very much engaged in that.

Obviously, Ericsson is number one in share, Huawei two, NSN three, and Alcatel-Lucent four. We are very strong in the base station area and will continue to try to win that business.

And I guess going back to the wireless test side, you had a competitor that said the market compressed from about $1.3 billion opportunity to $1 billion in 2013. One, do you agree with that assessment, and then two, do you expect that the competition will continue to compress that market in 2014, or should that industry turn back to growth?

We see growth in communications. For us, we have a forecast of 2% growth for the year. The market is probably flat.

There are two things going on. Obviously, the unit volume increases from 1.8 billion phones or the 1 billion smart phones that are being produced today. But you also do see some price erosion that goes on, as we have seen more consolidation in the marketplace, and you have seen a couple of the players, a couple of the smart phone manufacturers, actually put a little bit more pressure on the market.

The good thing about this market is that the standards continue to evolve. They are very highly complex technical challenges, and accordingly, we seem to offset that with our business in R&D, or by having leading edge technology. But looking at all that, we still see about 2% growth, when you factor in the unit growth and the pricing situation.

Okay. Very helpful. And last one, I guess for Bill, there are some components and subsystem suppliers in your academic and government food chain that are seeing an uptick in demand, especially North America, given the Ryan-Murray budget deal. And although you reported this area as being a soft area for you in the quarter, I am curious if you have seen any impact at all from the budget deal?

I am not sure that I know. There is nothing for us. Again, we've been a late entry into that market, since our progress that we have made in triple-quad and time of flight, and obviously, in our genomics area. And so I am not sure that our own issues are somewhat unique to where our investment strategy is, and exactly who those customers are, so we are not of knowledge that any particular impact, good or bad, versus the Murray Act that you had asked about.

All right. Great. Thank you for taking my questions. Good luck.

And your next question comes from the line of Doug Schenkel from Cowen & Company.

Thanks for taking the questions. My first question is on the decrementals again. The decrementals implied in this EMG guidance are, to be fair, pretty surprising.

If we go back 12 to 18 months, you said you couldn't cut spending anymore in the EMC without cutting phone, and last year you found ways to cut a lot more than people expected. Now, it doesn't seem like you are getting the leverage one would expect to see, if the cuts you made in the second half of last year were sustainable. In hindsight, did you cut too far last year, and did something change that suggests you now need to invest more in what appears to be a more challenging environment than you anticipated?

There is no doubt we cut very deeply, and I would say that we were on edge. There is a couple of product areas where we really needed to invest and win. It's as simple as that.

The wireless one box testers, we have talked about those key products, and again, we're in this for the long haul. We don't want to be short-sighted.

If we didn't anticipate an upturn that would be coming within quarters, we would you potentially do something different. But given how important it is for us to be number one, and given what we see coming, we believe that this is in the best interest of the shareholders, and they'll be happy for it over time.

Okay. The last few quarters you talked about picking up shares in areas like LC, and to an extent mass spec. And looking at your results it's not clear that continued in fiscal Q1, especially when you look at your growth and how it compares to some of the peers.

And related to this, it doesn't seem like your pharma growth was nearly as robust as some of your peers. What was different this quarter for you?

Again be very careful comparing quarter to quarter, particularly given our quarter is off all of our competitors'. We had a very strong end of the year. Our competitors have a very strong close at their end of the year.

You really have to look at the rolling four quarters, when you look at Agilent moving forward. If you, in fact, look at the organic growth rate in the last four, we are basically at the overall market.

I would argue the second half or the last two quarters, that we have been slightly above that. The beginning of the year we were slightly below that, moving forward.

But again, I would be very cautious of making those comparisons, because I am sure that many people asked our competitors, how come Agilent had such a great four? You've got to really normalize it on a calendar date, to really get a true view of what the true organic growth rate is. The bottom line is, last four quarters were basically growing over at the overall market, which we believe is about 5% organic growth rate.

This quarter I mean we have grown 6.4% on the currency-adjusted piece, taking into account the fact that we have China New Year which our competitors don't, and last year it wasn't there, it was safely in February.

So all good points, but to be fair again, you were the ones who proactively said you were picking up share in these areas. Do you still believe you are picking up share?

Yes, I am very cautious on market share. All the comment was is that our growth in our end of fiscal year was higher at that point in time than the competition. Then they ended their fiscal year, and you saw that little bit of shift moving forward.

We are very cautious on doing that. The competition is very good. They have their up and down quarters.

We have our up and down quarters, specifically in areas that we have done well, such as LC and other areas that we have been below the market. And so in aggregate, right now, if you look where everyone is today plus our additional month, we are roughly at -- non-currency adjusted, roughly at a 5% organic growth rate, which is the median -- it's the weighted average of the market.

Okay. And last question, and I think it's an important one, even though right now this isn't a huge part of your business. As we look ahead and we think about the Company post split, one of the things that's got people excited about the story is the prospects of Life Sciences being an above market grower, an above grower with the potential to really expand margins at levels.

But one important component is anatomical pathology growing strongly, and you did talk about not having a great quarter there. Again, one quarter doesn't make a trend. Can you tell us were autostainer placements about where you expected them to be, or is that a source of weakness in the quarter, relative to plan?

No. As Fred said, our placement is going exactly as what we want it to do. I have also been very clear that we are taking a very deliberate path to install, to ensure that the equipment works, that there aren't issues moving forward, that we have the right products that are validated on it, that we have new releases.

This is, and again, we have said this for many years. This is going to be a slow, methodical process.

We do not want to get ourselves in a situation where we overextend ourselves, we get placements in place that aren't performing to what we believe the instrument conforms. So we are systematically engaging, and as Fred said, installing dozens of systems every quarter.

Okay. Thanks again.

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

Maybe just two on the cost within the P&L. In the past, you have talked a little bit about your ability to, within your model, take down fixed cost in addition to some of the variable portions, if you do need to.

How much of a lever are you actually finding that to be at this point? And I guess as follow up, what portion of the cost structure is actually variable at this point?

Yes, again, I am going go back to the broad strategic decision. We, based on our guidance, given the uncertainty, we are not going pull the trigger right this moment, to dramatically reduce our variable spending. We could do that.

Didier talked about it. We did it last year ago and took $30 million out. All the triggers that we have had in place still exist.

There is too much uncertainty in the quarter to execute that. The issue clearly is in Keysight.

Ron's story is soon to be large shareholder, is all about growth, and we have to continue to execute on the programs that we have had. And obviously, Ron and the team as they move forward with the new Board, in fact, you don't have the group, you can pull those triggers.

So we can do that tomorrow. It is quite easy to pull the triggers.

All the variable components that we have in place are exactly as they were in the past, but just given the outlook it is, I think it is -- I am 100% supportive of Ron in his decision to continue to execute the plan, and be realistic on what the second-half recovery can be, and not just sit here today at the beginning of the year and hope for somehow you will get a huge growth in the second half of the year. I just don't want to set unrealistic expectations.

Your final question comes from the line of Bryan Kipp from Janney Capital Markets.

This is just a follow-up. Quick question. Any split costs you have in your assumptions for guidance for the rest of the year, or is it probably the same thing, the $25 million that you saw this quarter in the pull throughs?

No, we're going to give more detail in the March meeting, but in terms of the split cost, what we will say is that the one-time separation costs will be higher than what we said before. We're doing -- two things that are happening.

One is we are accelerating and expanding the branding of Keysight, and I think that's clearly a worthwhile investment. And we are making greater progress on the separation than we had alluded to.

The outcome of that will be is that the dissynergy costs on the Keysight side is going to be minimal, and the dissynergies on the Agilent side is going to be higher, just because of the great job the team has done in separating. As a result of that, for example, the service agreements that Agilent was going to soon provide for Keysight, there are not going to be that many service sites.

Again, we are making superb progress in setting up the IT system, separating the real estate, setting up all the systems to ensure that Keysight can be a very credible established company from the get-go. But there is no -- other than the shift back and forth, there isn't any substantive material change than what we have talked about, in my opinion.

Thank you.

We have reached our allotted time for questions. Alicia Rodriguez, back over to you for closing remarks.

All right. Thank you Tony. I just wanted to say thank you everybody for joining us on the call today.

If you have any questions, please give us a call in IR. I would like to wish you a good day.

This concludes today's conference call. You may now disconnect your lines. Presenters, please stay on the line.