安捷倫 (A) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Agilent Technologies Second-Quarter 2014 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)

Please note today's 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 second-quarter conference call for fiscal year 2014. With me are Bill Sullivan, Agilent's President and CEO; Ron Nersesian, President and CEO of Keysight Technologies; and Didier Hirsch, Agilent Vice President, 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.

Todays 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 and the separation of the electronic measurement business. 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.

Lastly, as we expect the third quarter to be the final quarter before Agilent's electronic measurement group begins operating as Keysight Technologies, comments today will also refer to the electronic measurement group as Keysight. Now I'd like to turn the call over to Bill.

Thanks Alicia, and hello, everyone. Today, Agilent reported second-quarter revenues and EPS in line with commitments, with solid growth in orders. Revenues of $1.73 billion were unchanged from a year ago. Q2 orders of $1.81 billion were up 7% over last year. Adjusted earnings of $0.72 per share were at the mid-point of our guidance. Operating margin was 18.2%. Keysight revenues came in at the high end of expectations. LDA revenues were slightly below the low end of our guidance. Both businesses built backlog as orders accelerated late in the quarter. Booked-to-bill for Agilent was 1.05, positioning us well as we move into Q3.

Our work to split the Company continues to proceed smoothly. By the beginning of August, we expect Keysight to operate independently as a wholly-owned subsidiary of Agilent. We continue to expect the separation to be completed by early November. Today I will share performance highlights for the life science, diagnostics, and applied markets that will become the new Agilent. Following my remarks, Ron will discuss electronic measurement markets that will become Keysight. Finally, Didier will provide a more detailed discussion of Agilent's overall financial results, as well as our guidance for fiscal Q3 and fiscal year.

Turning to DA, second-quarter revenue of $988 million grew 2% year over year on both a reported and core basis. We saw good growth across pharma, clinical and diagnostics, energy, and food businesses, tempered by the results in academic and government and environmental markets. Orders accelerated at the end of the quarter as we built backlog. Booked-to-bill for LDA was 1.04, with orders of $1.03 billion, up 4% or 5% on a core basis over last year. Operating margins adjusted to revenue were in line with guidance.

Turning now to performance by end market, in Life Sciences we saw strength in pharma biotech of 4%, led by demand for mid-size and specialized pharma customers. Diagnostics and clinical revenues were up 7%, driven by record companion diagnostic growth and strong demand for CGH arrays and target-enrichment solutions. Academic and government remained soft, down 6% year over year as government spending delays in the US and China pressured results.

In the applied markets, food testing was up 10%, with globalization of the food supply and brand protection continuing to drive strong demand. Energy grew 2%, led by the US and refinery projects in the Middle East. Conversely, environmental and forensics was down 5%, impacted by government funding.

On a regional basis, LDA performance was mixed. Double-digit growth in Europe was broad-based across markets. In the Americas, revenues were down 2% on delays in US government spending and softness in Latin America. Asia-Pacific was down 3%, affected by slower government funding and lengthened approval cycles in China. We saw improvement in China towards the end of the quarter.

Within LDA, our life science and diagnostic group had Q2 revenue of $577 million, up 1% from a year ago, as recurring revenues offset softness in instrumentation. Orders of $598 million were up 3% year over year. Operating margin was 13% for the quarter.

In early May, LDG recently announced the latest version of the chromatography data system, CDS, software called OpenLAB CDS. New features include: flexible data capture, improved automation, and faster data analysis. We also introduced a range of new LC products during this quarter's HPLC 2014, in New Orleans. Announcements include a new next-generation UHP LC multi-sampler, which sets a new benchmark in throughput, speed, and carry-over.

We also introduced an updated two-dimensional LC systems for higher-resolution applications. We are launching a series of new LC/MS and GC/MS products at ASMS next month. These solutions are differentiated by higher performance and lower cost of ownership, making them ideally suited for the applications in our core markets.

The chemical analysis group had Q2 revenues of $411 million, up 3%, and led by strong demand for GC/MS and ITP/MS and services. Orders of $432 million grew 6% year over year. Operating margin was 22% for the quarter. The ultra-high-performance 7200 GC Q-TOF continues to exceed expectations, with Europe leading all regions for the adaption of high-resolution, accurate GC/MS. CAG recently signed a major contract with a leading environmental company in Beijing. Agilent will supply GC/MS technology for online air-monitoring systems related to ozone and other air pollution, airborne pollutants.

Looking forward, LDA's outlook remains positive, supported by our backlog build, a robust pipeline of new products, and expectations for increased flows in government spending. We remain committed to creating shareholder value by increasing our organic growth rate, delivering complete work flow solutions for our customers, and growing earnings faster than revenues. Moving forward, our priorities are to continue our late Q2 order momentum into Q3, launch a series of new products, and continue to drive our manufacturing cost-reduction programs.

LDA revenues for the fiscal third quarter of FY14 are expected to be between $1 billion and $1.02 billion, or nearly 5% core growth at the mid-point. We expect operating margins at the mid-point of 18.5%. For the full year, we now expect LDA revenues to range from $4.02 billion to $4.12 billion, with operating margins at the mid-point of 19.3%. DDA 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 Keysight and the electronic measurement business.

Thank you Bill, and hello, everyone. I have three key headlines for you regarding Keysight's performance in Q2. First, Keysight came in at the top end of its revenue and operating margin guidance. Second, Keysight orders returned to growth in Q2. Third, Keysight is on track with its plans to separate from Agilent.

Now moving to the specifics. Revenue of $743 million declined 2%, or 1% on a core basis, while orders of $782 million were up 11% year over year. This resulted in a booked-to-bill ratio of 1.05. Keysight continued to not only effectively manage gross margins and spending, but also had a favorable mix profile this quarter. Keysight generated operating profit of $148 million, and an operating margin of 20% for the quarter.

Looking to our end-market performance, aerospace and defense revenues declined 6% year over year. With US budget approvals in place, direct government demand has improved, while prime contractor business in the US remains soft. International aerospace and defense demand was mixed but steady. Industrial computers and semiconductor revenues increased 3% year over year. Investments in next-generation semiconductor process technologies, continued in the second quarter, while computer markets remained soft. Communications revenues declined 6% year over year. We continue to see strength in 4G base station infrastructure demand, while handset device manufacturing remains moderate.

On a regional basis, we saw very good growth in Asia, excluding Japan, which grew over 20%, with strength across most market segments. The Americas region was down double digits year over year versus a strong compare. Japan declined 12%, or down 4% on a core basis, which excludes the impact of currency. Europe was essentially flat year over year.

As I discussed during our Analyst Day in March, Keysight is transforming its product portfolio with the goal of returning to market growth rates. This quarter, we began shipping both the UXM wireless test set for R&D, and the EXM wireless test set for manufacturing. The EXM wireless test set won 2013 Product of the Year Award from the Electronic Products China.

In April, Keysight expanded its performance network analyzer series with a low-priced model, targeted at low-cost RF components, used in handsets and consumer products. Keysight also introduced two high-performance portable oscilloscopes deploying next-generation technology, one set a new standard for signal integrity, and the other set a new standard for price performance.

We expect Keysight to begin operating as a subsidiary of Agilent on August 1, and to complete the spin-off in early November. As part of our journey, we are announcing today that we expect Keysight common stock to trade on the New York Stock Exchange under the ticker symbol keys, K-E-Y-S.

In addition, at the end of this quarter we will implement an operational cut-over of our IT systems. This transition requires tight coordination of our shipment and delivery plans. We are working with customers on the cut-over which could cause some revenue to shift between the quarters. As Bill had said, it takes a lot of work to create two great companies from one. Along with all of the excellent internal work, we continue to focus on our customers and all of their measurement solutions needs.

Turning to the outlook for Q3, we expect Keysight to return to revenue growth, with revenues in the range of $720 million to $760 million. We project core growth at the mid-point to be 5%, and operating margins at the mid-point to be 18.4 %. For the full year, we expect revenues in the range of $2.86 billion to $3 billion, which represents 2% core growth at the mid-point. Operating margins for the full year are expected to be 18.9% at the mid-point. I will now turn it over to Didier to provide the details of Agilent's overall financial results.

Thank you Ron, and hello, everyone. To recap the quarter, our revenue of $1.731 billion, operating margin of 18.2%, and earnings per share of $0.72, were all at the mid-point of our guidance. Orders exceeded our expectations, but the quarter-(inaduible) orders queue was also higher than usual. By business, most of the operating profit variance versus the mid-point of our guidance was due to volume and mix.

Please note that Q2 core revenue growth by segment and by geography is reported in the slide deck posted on our website. This quarter, currencies subtracted about 0.9 percentage points from our year-over-year revenue growth, and acquisitions had no material impact. Finally, we bought back $50 million of stock in Q2, and generated $272 million in free cash flow, slightly higher than last year.

I will now turn to the guidance for our third quarter. We expect Q3 revenues of $1.74 billion to $1.76 billion, and EPS of $0.72 to $0.74. At mid-point, revenue will grow 5% on a core basis. Our 18.5% projected operating margin at mid-point will be 30 basis points higher than Q2 FY14, and 20 basis points higher than Q3 of last year. Remember that we initiated a drastic cut in discretionary expenses early February of last year that resulted in significant expense reductions in the ensuing months, so we face a tough compare. While we are maintaining our spending discipline, we are also investing in key growth initiatives.

Now to the guidance of FY14. We are confirming the guidance we provided last quarter for both revenue and EPS. As a reminder, we expect FY14 revenues to range from $6.9 billion to $7.1 billion, and FY14 EPS to range from $2.96 to $3.16. With that, I'll turn it over to Alicia for the Q&A.

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

Certainly.

(Operator Instructions)

Jon Groberg, Macquarie.

Maybe for both Bill and Ron, can you talk a little bit more about the pacing in the quarter? I think you made some comments that orders picked up towards the end of that quarter, in particular in China, that some of the delay you started to see materialize? I don't know if that was more just an LDA comment or if that was also a Keysight comment? Can you maybe talk a little bit about some of the other emerging markets, and whether you're seeing any impact in countries like Russia, eastern Europe, given the environment over there?

I'll just make a couple comments, Jon, regarding LDA, and then turn it over to Ron. The real story of the quarter in my mind is the fantastic order performance of Keysight while maintaining their operational excellence. As Didier alluded to, the orders in LDA came in late in the quarter, which is atypical, given that half the business is in consumables and parts that tends to have a more uniform order pattern than you typically see in Keysight. We had a back-end bias that obviously affected our revenue. Our revenue was below our own internal expectations and external guidance moving forward.

The good news is the orders were there, and as we guided going forward, I think we're in a solid position moving into Q3. But we really did have a surge of orders at the end that was out of typical sequence moving forward. I'd rather turn it over to Ron and talk about Keysight. Jon, if you have any other questions, I can have Mike and Fred talk specifically, in terms of what they saw in their respective businesses. Ron?

This story was a little bit different in Keysight, where we saw orders that were a little bit more balanced throughout the quarter. Clearly with wireless manufacturing the orders are lumpy, and the good news is that with the wireless manufacturing and semiconductor business that we had, we achieved more orders towards the first two-thirds of the quarter. That enabled us to exceed our revenue guidance.

As far as the emerging markets, Russia is the biggest wild card that we have, given everything that is going on over there politically. We actually had a decent quarter, but we are cautiously watching what will happen as we look in Q3. We expect our performance in Q3 in Russia to be flat. All signs so far on a local level appear to be consistent with that.

I'll just follow-up, Jon. Maybe, Mike, you could make some comments on the order pattern on the applied side, and then Fred on the life science and diagnostics side.

Sure, Bill. Jon, it's Mike McMullen. To add some additional commentary on the quarter, very pleased with the overall order rate for the business. I think you can see the backlog we've built and the difference between the growth rate of our segment orders versus revenue. Particularly pleased by a return to really solid growth in our core instrumentation platforms. As you know that's been an area of struggle in the last several quarters where we've looking for this turn-on in the replacement market.

What we're seeing is a warming up of the replacement market and signs of returning of spending on some of the government side, particularly in the US and promises in China. So, very encouraged by the overall global results, in particular, how we finished the quarter in China.

Let me just add also, a couple of comments. If you look to the different markets, we saw strength in the pharmaceutical market, as Bill has pointed out. On the one side even so, the consolidation put some hold on it, the growth rate was predominantly coming from small pharma companies. I think if you look to the geographies, China was a little bit behind. I think a bit suffering in the US. Europe was doing quite well, and specifically to the comment on Russia, even so there is impact. The size of the business from an LDG perspective is rather marginal, minor impact from that perspective.

Okay. If I can, two quick follow-ups. On the LDA side, just to be clear, what did you grow in China in the quarter, and what's your expectation for the year? For Ron, on the Keysight side, I think you guided a 5% core growth in the third quarter. At your Analyst Day, you commented on high-single-digit growth for Keysight in the second half of the year. I'm curious if that guidance still stands, as well? Thanks.

To give you an indication in round numbers, China's business was down mid-single digits. On the flip side, orders were up mid-single digits.

On the Keysight, our guidance from last quarter still stands. We had expected 5% in Q3, and then that accelerates in Q4.

Doug Schenkel, Cowen & Company.

You essentially reiterated LDA revenue, and you guided the July revenue quarter about in line with what we were expecting, so all in all, no real change in guidance or quarterly pacing for revenue. However, your fiscal Q2 operating performance in LDA was much weaker than expected. You guided fiscal Q3 Op margin for the group a bit below our expectation.

This implies that fiscal Q4 operating margin, I think gets up to somewhere between 21.5% and 22%, assuming I'm doing the math right. If so, this implies an incremental above 30%. Year over year this doesn't seem Herculean, but it does arguably represent a pretty material level of improvement over the last two quarters of the year, relative to what was a weak quarter this quarter.

Can you talk about how confident you are in this guidance, and more specifically, what makes you so confident that you can get to those levels subsequent to this performance? I think as you're talking about this, I think to be fair, you guys didn't spend a lot of time explaining why the margins in LDA came in at these levels in the quarter. Maybe you could talk a little bit more about that?

Hi Doug, this is Didier. I'll start talking about the numbers, and then probably my colleagues will want to talk about their confidence to achieve the second half. But in terms of Q2, what happened is, yes, LDA's operating profit was below the guidance; but very much in line with our revenue mix, which again was due to orders being skewed towards the end of the quarter. Therefore, we will recover that miss into the second half. That explains the second-half pattern. Basically, nothing special in Q2.

The main reason by far for the operating margins performed below the guidance is volume and mix. As we are recovering, because we have a high backlog going into Q3, obviously we will see that, the offset, in the second half. Now within the second half, there's no doubt that even the second half, even though there's an expectation of a significant improvement in operating margin between Q2 and Q3 for LDA, there's further improvement expected from Q3 to Q4 in line with the revenue growth.

I'll just add on to Didier. It goes back, your arithmetic is correct, Q4 is our strongest quarter of the year, very typical. With companies like ours the last quarter tends to be strong. If you go back to 2013, LG went from Q3 to Q4 from 16% operating profit to 19%, and the chemical analysis went from 21.5% to 25%. Again we're not forecasting anything that we have not seen in the past. Obviously, both Mike and Fred have committed to meet this guidance.

Absolutely, Bill. This is Mike. Very confident on our plans for the second half.

All right, thank you for that. That's helpful. If I could ask one more, I think it's interesting that you noted challenges for LDA in China within the academic government end market due to the release of budgets. Over the course of the recent earnings season, we've really heard this only from Waters. We heard it a little bit from others, but they didn't really call it out as notably as you and Waters have. I'm pointing to companies like Thermo, Danaher, PKI, and Bruker, just to name a few.

On the surface, the common denominator here seems to be maybe instrument mix as a percentage of sales, and possibly more exposure to LC. I'm just curious if you would speak to what specifically you're seeing in terms of what's slowing down in China within the academic government end market, and what isn't? I think it would be helpful to contextualize what is going on and why this seems to be specifically impacting some more than others? Thank you.

Yes, what I'll do is I'll have both Fred and Mike comment on that. Again, the China FDA is in a major reorganization. Parts of the business they regulate, we have very large market shares. But I'll have Fred start on the academic research, and then also Mike can chime in on some of the applied and food areas where we have very strong positions.

Thank you, Bill. Let me first make one statement about the growth in China overall. If you look to the second quarter and compare this year's second quarter and compare that to the second quarter last year, I think the growth in general has slowed as such so that's a general observation. Secondly, I think if you look to the pharmaceutical industry, there has been quality regulation imposed to the pharmaceutical industry in the GMP space, good manufacturing practices. This drives part of the consolidation in the China pharmaceutical industry, which means another investment is retarded quite a bit.

China academic spending, as Bill already pointed out, I think this has been also temporarily slowed down due to some regulations which have put in place in terms of anti-corruption, which is also something which probably will go away over time once the process has been installed. Finally, as Bill also pointed out, China FDA is at the moment restructuring the food-testing labs. Until this restructuring has been completed, I think we will see a pretty shorter investment pattern of the food labs, which probably is in order of couple of $10 million per quarter. I think this both, as soon as this has been removed, it will stimulate the orders again.

Just building on Fred's comments, specific to the food market, it's the heavy platform usage of LC in the food market where Agilent, as you know, has a leadership position. It's a double-edged sword where we really are effective, and we see budgets shift to latter part of the year. I think there's a heavy concentration of liquid phase used in that market segment.

Again, that's why in the early part of the call, I indicated I was very delighted by our performance in Q2 from the order perspective; because despite the challenges that we're highlighting here, in terms of timing of the food orders in China, we saw very strong growth in the environmental side, as well as spending in the petrochemical chemical side, on the private sector side of the market place. That's why looking ahead to second half 2014, you were getting a positive view overall about the business.

One final comment with regards to China. It's slightly different in the space of genomics and diagnostic business, where we saw a different pattern and we saw pronounced growth beyond the instrumentation, Mike and I were talking before.

Richard Eastman, Robert W. Baird.

Yes. Bill, I think when you were talking about LDA in total you commented about revenue out of Europe being plus-double-digits, with pretty much Americas and Asia-Pac softer. Could you be a little bit more specific? Is that end markets, or what was as strong in Europe?

Europe was strong, as I had noted, across all markets. Again I'll have Fred, having, living in Europe, talk about it and have Mike chime in. But our Europe team did an outstanding job across all of our products to be able to grow in the low teens growth rate in orders. Fred?

Yes. I think Europe, as we see the recovery, particularly in the academia and government world, you're seeing a stimulus of the orders. If you look to the different industries here, and Mike can comment on the chemical analysis side, we saw significant pick-up in the pharmaceutical industry. We were pretty successful, particular there was the LC/MS. I believe this will continue in the second half.

To build on Fred's comments, what a difference a year makes. Europe was a real area of strength for us in the quarter. As Bill mentioned, our team there is doing an outstanding job driving share, in what is now a growing market for us. We started to see an up-tick in the chemical energy space in terms of the replacement side of the business. Investments in the food area continue to be very strong in Europe, as well as in the forensics area.

Okay. A quick question on Keysight. When we look at the order growth, the 12% order growth year over year; I'm curious if, Ron, can you give a picture of, is that order growth strengthened significantly in any of these three pieces, in particular comms or A&D? Is there some re-capture of market share that you can identify?

First of all, 11% order growth was driven with two main areas. As you know, the wireless manufacturing business is a lumpy business. We were very successful in that area in the base station growth, as we mentioned. The second thing we talked about last quarter, as well as today, is in the semiconductor expansion as they move to new technologies. Again, that was something that also drove our business. I was pleased to see double-digit order growth in all of our major regions except Japan, which is having some problems. That is a nice point that led to our 11% growth.

Ron, one of the things that we picked up in the channel, in the A&D business, in particular on the defense side, the Department of Defense US. I believe they've changed the way they are purchasing. Previously, they had purchased test equipment and pushed that test equipment down to the vendors, stating the protocol and providing the test equipment. Our understanding is that has switched around. Now the DoD is asking the vendors to purchase the equipment. I'm curious, is that changed anything in the channel? For instance, lease versus purchase or --?

No, we've always seen a mix between direct government purchases and purchases by the prime contractors. As I mentioned earlier, the direct government purchases has picked up, but the prime purchasing has not. If you look at the financial results of the prime contractors in the US, that would explain it. Internationally, there was no significant change there. That business was roughly consistent with where it was before.

Okay. Very good. Thank you.

Dan Leonard, Leerink.

Could you speak to the order trends in large pharma? I know you mentioned mid-size and I think specialty pharma was strong. I'm asking because there was in increase in M&A chatter toward the end of the quarter, and I'm wondering if that's put any freeze on ordering?

What we are seeing in the pharmaceutical market at this point in time that the consolidation talks between the big pharmas like Pfizer and AstraZeneca is certainly putting some hold on the whole investment pattern in the pharmaceutical industry. I think as I said before, the smaller pharma companies are driving the growth at this point in time. Over time, as soon as this situation has cleared up, we will see that those big companies will go to single-vendor concepts. Our opportunity there is to be a systems provider for those big pharmaceutical companies.

Got it. That's helpful. Didier, to follow-up on Doug's question from earlier, can you elaborate a bit more on the negative mix component in LDG? I'm still trying to get my arms around it, since it was the lowest performance in a couple years.

Yes. I won't go into the details, but when you do the math, we have about, you would expect about 65% contribution margin versus the variable cost of sales. If you do the math on the reduction in revenue, versus the guidance that we've provided, and you say, okay, basically 65% of the reduction in revenue will fall to the bottom line; basically what's left is like $4 million or $5 million. Doing the analysis, and again, we have plenty of products and markets and product lines like that. Whatever is not explained by pure volume, which is about $4 million, we could explain it mostly by mix factor.

Thank you. Finally, a really quick one. Did you notice anything in the life science and diagnostic and chemical analysis businesses, did you notice anything unusual about the revenue or ordering patterns from Japan in the quarter? I ask because there's been some discussion that a tax change on April 1 might have shifted around some purchasing. You guys with an April end quarter should have, could have some insight into that?

I think it was in March. We saw a pretty good month, because this was just before the tax rate. This good order rate got partially compensated by the April, by the fact that there was a higher sales tax. But in general, if you look to LDG, you have exhibited some overall growth in Japan.

Great. That's helpful. Thank you, Fred.

Tycho Peterson, JPMorgan.

EMG came in at the high end of guidance. Can you talk to where you were most surprised to the up side? Looking ahead, you do have a competitor that's talking about in handset testing another $300 million or so coming out of that market. Can you talk to whether you still think flat growth for that market is the right assumption?

Sure. The semiconductor market or the semiconductor test equipment market was very hot, and we have very high margins in that business. Accordingly that helped us, and that's why we had such outstanding incremental above the mid-point of the guidance, over 80%. But that's not something that we expect to repeat. We have been seeing a lot of price pressure in the handset wireless manufacturing segment. That is why our strategy continues to be to move more and more to R&D, but that pressure that is there on the pricing continues to accelerate.

If you take a mix of high, let's just call it, a lot of semiconductor shipments and very little or less handset manufacturing shipments, you get the very strong incrementals. As we go to next quarter, we expect to have a much more normal balance as we move from Q2 to the Q3.

Your view on the overall handset testing market? Do you think that market remains flat, or do you see it consolidating or contacting?

I think there is significant price pressure as that market has become crowded, and manufacturers continue to look for simpler ways to test their products. It's all about cost per test. The market's very competitive. It's one of the lower-margin areas, or one of the lower-margin businesses that are there. We are seeing competitors acting more desperate ways on the pricing side. We're doing the right thing for the shareholder and making sure we're getting a return on everything we invest in and where we put our effort.

Then for LDA, it sounds like environmental forensics was the delta, relative to expectation. It sounds like you were expecting a recovery in that business toward the back half of the calendar year. Is that driving the potential upside? At DACO, you had previously called out some delays, I think in pathology. Did those come through this quarter?

Why don't I jump right in and offer my perspective here. The environmental and forensics business was down in Q2. The story here remains the weakness in government spending, particularly in the more developed countries and economies. When I look to the second half, we are expecting to see improvement in the area, as some of the government budgets are released, I'd say, in the US. We are expecting some up-tick in the second half in those areas, both at the federal and state level.

I also think the bigger driver is China is the overall global food market, and the growth in the chemical energy space. Our major customers are now talking about investing in capacity in the US because of the lower feed stocks making their overall operations much more profitable. Clearly there's an element of recovery building around the environmental forensics market, but I also expect strong growth in our other two larger markets.

Bill, can you comment on DACO? Did you have some pathology orders that came through from the prior quarter and (inaudible - technical difficulty)?

Yes, I'll have Fred give a response. Again, our clinical and diagnostic business grew 7% in the quarter.

This is exactly right. I think we had a really strong quarter for diagnostics and genomics. In particular, the diagnostic piece was growing mid-single digits, and is driven by the pathology business, and even more so by the companion diagnostics, which really was outstanding, as Bill mentioned in his initial comments. I think genomics we see a pronounced need in the market at the moment. We think it's growing about mid-digit to high mid-digit range. It's predominantly driven by cytogenetics and the CGH race, and secondly the target enrichment business, which is going very nicely, also relative to our competitors.

Okay. Thank you.

Paul Knight, Janney Capital Markets.

This is actually Bryan Kipp, on behalf of Paul. Ron, wanted to start off on the EMG. I know it's been discussed throughout, but had an additional question here. You talked about wireless manufacturing orders and semiconductor orders starting off pretty strong and being pulled through in the quarter. Were some of those orders stuff you expected in the second, I guess, in the third quarter? I know you'd said that 5% you expected for core growth anyway?

In addition to that, fourth-quarter growth obviously has to be in that high-end of prior guidance. I think the second half is alluded to as 8%. What's really driving that for you? I know you've mentioned strength in the wireless and semiconductor demand. But is it new products, some of those existing products, legacy products, just to give more clarity around that?

Sure. Well, first of all there was nothing pulled up to, when we look at the 5%, nothing was pulled in to Q2 that would make our Q3 look weaker, and that's why we feel confident with the 5%. We've always assumed an economic outlook that would pick up towards the end of the year. That's there as a low-level baseline. On top of that, the government, which has not been purchasing very much obviously during sequestration; they finally are getting their act together on getting money out to the people that make the decisions. We expect the government business to accelerate towards the end of the fiscal year for the government in September in the US.

On top of that, our seasonally high quarter is always Q4. Q4 is our strongest quarter. If you look at what we did last year, $705 million in Q4 was a relatively low compare. If you take a look at the low compare, you look at your $780-ish million in orders in Q2, we typically see Q2 and Q4 be strong against a compare of $705 million. You can do the math and get there pretty quickly with any type of economic strength or slow recovery, and with some new products that are coming out. I mentioned the UXM and the EXM. Our competitive position is very strong; it's as strong as it has been in years in those areas, but we'll continue to build on those.

Appreciate it. On the -- go ahead.

No, I was just wondering if that was suitable to answer your question.

Yes, appreciate it. Then an additional follow-up on the chemical side. Cited GC Q-TOF as strong adoption in Europe. I think it's seen consecutive quarters of strong refinery demand in the Middle East. Order bookings were plus 7% on a core basis. Is it being driven by broader QC adoption and demand, or what's really driving that core order growth there?

Great question, thanks for that. On the mass spectrometry side, there continues to be demand, particularly for technologies that allow you to look for unknowns. This has become an increasingly desired capability, both in the food, but also in the forensics area. That's why I spoke earlier to some bright spots in terms of forensics coming up.

The demand for mass spectrometry is really continuing to be driven by the food market, but also this emerging requirement to identify unknowns, both in the food supply, as well as in designer drugs for forensics. You hit the nail right on the head in terms of what's going out in terms of Middle East. We're seeing infrastructure build-out, major projects coming to fruition, and Agilent's very strong in this space, and we're getting the business.

Thanks again.

Hope that answers your question.

Yes. Thank you.

Isaac Ro, Goldman Sachs.

Wondering if on the on the LDA side, just want to dive a little bit more in the weakness this quarter on revenue. Was there any meaningful impact from your exit last year from the high-end NMR markets. Just trying to get a sense of whether that was a factor. As we move through the balance of the year, maybe you could put some color around what's baked into your expectations, just given we'll be lapping through the exit of that business, but at the same time you had a pretty healthy order dynamic this quarter?

Yes. Our shortfall in revenue in the quarter, as we have said, is really directed to the late orders that came in that were atypical. The NMR business was not material to that issue at all. As you can hear from the comments, for every place that we had some good news, we had some offsetting bad news. Quite frankly, it was a mixed quarter. I think the message is the orders ended up being strong, and we feel comfortable with the guidance that we've given as we move into the second half of the year.

Got it. I apologize if you guys gave a number, but hoping for the overall growth rate in China, if you could speak to that? I know you guys gave a consolidated Asiatic-Japan number, but maybe try to tease out China on the growth rate, and what you're expecting for the balance of the year there? Thank you.

On the LDA side, the business was down mid-single digits. Orders were up mid-single digits moving forward. For us to be able to grow 5% in the second half we have to continue to see the order momentum in China as we move forward. I think both Mike and Fred talked about where we think that there will be opportunity as the government reorganizations and focus are completed. That was indicative of a stronger orders in China at the end of the quarter.

Got it. Thanks a bunch.

Brandon Couillard, Jefferies.

Bill, in terms of the late 2Q order surge, was it attributable to any particular end market customer or geography, or would you characterize it as more broad--based?

I'll have Mike and Fred make a comment. From an aggregate it was broad-based, but Mike and Fred probably have a little more insight if there's any nuances. I'm not sure statistically if there's a lot of variation. We do tend to have a surge of orders at the end of every quarter. On the LDA side as I had mentioned, it's because only half the business is capital equipment, it tends not to be as high as you typically see in Keysight. Mike, if you have some thoughts, and then Fred?

Just to build on Bill's comments, geographically, I think the story we've already talked about China and the strong close there. We also saw it in the United States and in Europe. I think those three geographies really drove the results for the quarter. This a repeat from some of the earlier commentary in terms of strength in the food market, which continues to be globally a very strong market for us, even with the government push-outs in China in terms of major projects. I said earlier the return to growth in the chemical and energy space is really promising to see.

Also building on Mike's comments, I think we talked about the pharmaceutical industry. We will see a slight up-tick in the second half. We talked about the academia and government market, where we believe there will be some relief of the budgets where we can participate. Europe in general, as Mike said, was going quite well. From that perspective, we are positive that we can deliver the results Didier was referring to.

Thanks. Didier, I didn't hear you mention expected share count for end of the year. Should we still expect about $100 million of share repurchase activity in the back half?

We have, last time at the analyst meeting we talked about spending $400 million over the next, I mean this year, over this year and next. So far, we've bought $150 million this fiscal year, and we will see. In terms of the share count, you can assume for your projections 338 million shares in Q3 and 339 million shares in Q4.

Thank you.

(Operator Instructions)

Patrick Newton, Stifel.

This is Robert (inaudible) for Patrick this afternoon. A couple questions. We talked a lot about China and LDA. I'm wondering Ron, if you could perhaps provide some insight on how EMG fared in China? Any impacts from the LTE roll-out?

As I mentioned earlier on a broad basis that we did very well in base station infrastructure build, there's a lot of manufacturing that goes on in that area. But nothing unique in China this quarter. We continue to be very competitive in that space, but nothing significant to report.

Great, thank you for that. Staying on the EMG tilt, I wonder if you could provide any update on UXM, and has that led to an improvement in your position in wireless, or have you seen any gain in share of the customers you had previously lost share in?

Yes. We, by adding the UXM, which is the R&D wireless test set, we have actually been involved in much more direct conversations, more bids, and winning more business than we have done previously. The way it's typically done is someone will test out the box, figure out if it has the right type of coverage or testing capability, and then if they like it enough with one product, they'll start using it, and then that gets replicated.

The response on UXM has been excellent. But the R&D market is not like the manufacturing market, where someone likes it, they'll go buy 2,000 of them at once. That will roll out in a much slower area. R&D we see a much steadier pace, not as volatile, not as fast up, not as fast down. But we're very pleased with both the UXM and the EXM and their competitiveness.

Great. Thank you for taking my questions.

Thank you. That concludes our question-and-answer session for today. I would like to turn the conference back to Alicia Rodriguez for any closing comments.

Thank you, Karen. I wanted to thank everybody for joining us today, and wish you all good day. If you have any questions, please call us at IR and we'll be happy to give them an answer. Thank you.

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