安捷倫 (A) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Agilent Technologies, Incorporated fiscal third-quarter 2014 earnings conference call.

(Operator Instructions)

Please note today's conference is being recorded. I would now like to hand the conference over to Alicia Rodriguez, Vice President of Investor Relations. Please go ahead.

Thank you, Karen, and welcome, everyone, to Agilent's third-quarter conference call for FY14. With me are Bill Sullivan, Agilent President and CEO; Ron Nersesian, Keysight President and CEO; and Didier Hirsch, Agilent's Senior Vice President and CFO. Joining in the Q&A after Didier's comments will be the Presidents of Agilent's Life Sciences, Diagnostics, and Applied Markets, or LDA businesses, Mike McMullen and Fred Strohmeier. Also joining from Keysight will be Neil Dougherty, CFO, and Guy Sene, Senior Vice President of Measurement Solutions and Worldwide 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 breakouts, business segment results, and historical financials for Agilent's operations. We will also post a copy of the prepared remarks following this call.

Today's comments by Bill, Ron, and Didier will refer to non-GAAP financial measures. You will find most 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, we expect this to be the final quarter in which we conduct the joint conference call for both Agilent and Keysight. We expect the Companies' separation to be finalized in early November after which Keysight will operate and report as an independent company. And now I'd like to turn the call over to Bill.

Thanks, Alicia, and hello, everyone. Today Agilent reported third-quarter revenues of $1.77 billion, an increase of 7% versus last year and above the high end of guidance. Orders of $1.74 billion were up 9% over a year ago.

Adjusted earnings of $0.78 per share also exceeded the high end of guidance and increased 15% over last year. Operating margin was 19.2%, up 90 basis points from the third quarter of FY13.

Both Keysight and LDA delivered on revenue and earnings commitments. In most end markets we saw continued improvement and good order growth across both businesses.

Our work to split the Company continues to go very well. On August 1, Keysight began operating as a wholly owned subsidiary of Agilent. We expect the separation of the Company to be completed by early November as planned. Today I will share performance highlights of LDA, or the Life Science, Diagnostics, and Applied Market businesses, that comprise Agilent moving forward. Following my remarks, Ron will share performance highlights for Keysight. Finally, Didier will provide a more detailed discussion of Agilent's overall financial results as well as our guidance for the fiscal fourth quarter.

Turning to LDA. Third-quarter revenues came in at $1.01 billion, up 6% over a year ago or 5% on a core basis. Orders grew 10% to $1.02 billion, or 9% on a core basis. Operating margin was 19%, up 50 basis points from last year.

In our diagnostics and clinical markets, revenue grew 6% with strength in array CGH, target enrichment, as well as demand for pathology products in the US and Europe. Revenue from analytical lab markets also grew 6% in Q3. We were pleased with the growth we saw across our instruments, services, and consumables portfolio fueled by new offerings to the marketplace.

Within the Life Science and Applied Markets that make up analytical laboratories, pharma biotech was up 8%, led by mid size and specialized pharma customers. Life Sciences research was up 4%, posting the best year-over-year growth in two years. Results were driven by increased government spending on capital equipment in the US and Europe.

Government spending also was a catalyst behind 16% growth in environmental and 12% growth in forensics. In food, revenues were up 4% over last year as results in the US and Europe were offset by the impact of the FDA restructuring in China. Chemical and energy revenues were relatively flat, growing 1% largely due to softer demand from China versus a year ago.

Geographically, economic recovery and government funding drove growth in the Americas and Europe, up 6% and 8% respectively. Asia Pacific grew 4%. China continues to work through government agency reorganizations which is resulting in longer approval cycle.

Turning to the business segments within LDA. Life Science and Diagnostics [groups] revenue grew 5%. Orders grew 11% with broad strength across LDG products. Operating margin was almost 16%, down slightly from last year and up 260 basis points from last quarter.

LDG introduced a number of new products in the quarter. One highlight was the 6495 LC triple quad mass spectrometer, which provides higher sensitivity, robustness, and reliability. Another highlight was the introduction of the IQFISH work flow for bone marrow and custom FISH service through SureDesign.

Both FISH products provide high quality results with significantly shorter turnaround times, from 16 hours to 2.5 hours in the case of the IQFISH. LDG also signed a development of commercialization agreement with Merck & Company for a companion diagnostics device, using Dako's IHC solutions with Merck & Company's anti-PD-L1 cancer drug.

In the Chemical Analysis Group, revenues and orders increased 8%. Operating margin was over 23%, up 180 basis points from a year ago. CAG announced the 5100 ICP-OES in July. The new product runs analysis 55% faster and uses 50% less gas per sample than competitive systems. The 5100 is suited to applications in environmental, food, energy, and pharmaceutical markets.

CAG's recently introduced 7010 GC triple quad mass spectrometer targeted for the food safety market lowers costs and improves ease-of-use compared to current high resolution mass spec systems. The 7010 significantly strengthens Agilent's market position with a range of pricing options, performance, and productivity benefits.

In July, the Cary 700 universal spectrophotometer was named a 2014 R&D 100 Award Winner. The award recognizes the 100 most technically significant products introduced in the marketplace over the past year. This award marks the third consecutive year Agilent's spectrophotometers have been recognized as R&D 100 award winners. In 2013 the Agilent 8800 triple quad ICP-MS won the award, and the Agilent 4100 microwave plasma atomic emission spectrometer won in 2012. These awards demonstrate the benefit of our investment in spectroscopy.

Looking forward to Q4, we expect mid-single digit growth across LDA as we continue to build on our order momentum, gain traction with new products, and drive manufacturing cost reductions. We remain committed to creating shareholder value through increasing our organic growth rate by leveraging Agilent's strength in the analytic lab into the fast-growing genomics and diagnostic market, continuing to differentiate through best-in-class tools, work- flow solutions and customer experience, and finally, expanding operating margins and return on invested capital consistent with our long-term operating model.

Turning to guidance. LDA revenues for the fiscal fourth quarter of 2014 are expected to be between $1.07 billion and $1.09 billion, or 6.2% core growth at the mid-point. We expect operating margins at the mid-point of 21.1%. For the full year, we expect LDA revenues in a range from $4.07 billion to $4.09 billion, with operating margins at the mid-point of 19%. Didier will provide additional details in his remarks.

Thank you for being on the call. I will now turn it over to Ron to talk about Keysight and the electronic measurement business.

Thank you, Bill, and hello, everyone. I'm pleased to report that Keysight had a very good quarter and we continue to focus on returning to market growth rates while meeting operating margin expectations.

Turning to our performance, I will start by highlighting three key headlines from Keysight's third quarter. First, Q3 revenues came in at the top end of our guidance range and operating margins were above expectations. Second, our overall outlook and forecast for the second half remains unchanged despite potential disruption from geopolitical, macroeconomic, and Company separation risks. And third, as Bill mentioned, we began operating as Keysight Technologies on August 1 and remain on track to be fully separate from Agilent in November.

Now let's move to the specifics. Keysight revenues of $757 million increased 8% year over year, while orders of $722 million were up 7%, resulting in a book-to-bill ratio of 0.95. Keysight continues to deliver solid profit margins, generating operating profit of $149 million for the quarter, which corresponds to an operating margin of 20%.

Last quarter we highlighted the operational separation of Keysight that occurred on August 1. This was a massive step that had the potential to impact the timing of customer shipments. In fact, some customers requested early deliveries to ensure no delays during our transition, and this moved some revenue from Q4 into Q3.

As we have consistently noted throughout the year, we expected our aerospace and defense and communications markets to grow in the second half. These markets were the drivers of Keysight's Q3 growth, but strength in these markets were offset in the industrial and computer markets.

Aerospace and defense revenue grew 13% this quarter, with strength in both government and prime contractor business as well as regional strength in the Americas and Asia. Communications revenue grew 16% in Q3. Wireless base station and component manufacturing were strong; however, handset manufacturing was weak as customer buying power and increased competition accelerated price erosion in that business.

Industrial computers and semiconductor revenue was flat year over year. Continued strength in semiconductor end markets was offset by the softer computer business.

On a regional basis, revenues grew year over year in all regions with the exception of Japan. Europe grew 16% versus a soft compare last year. Asia Pacific, excluding Japan, improved 11%, with positive growth across nearly all segments. The Americas grew 8% while Japan declined 13% due to declines in government aerospace and defense spending.

Overall, Keysight continues to invest in the transformation of our product portfolio with a focus on modular software and certain wireless solutions. Aligned with this focus in Q3, Keysight was awarded the Global Frost & Sullivan award for growth excellence leadership in the PXI instrumentation market. We also announced the strategic partnership to collaborate in early 5G research with China Mobile, the world's largest mobile network operator, and we announced participation in the Korea 5G forum.

Keysight introduced new products in the quarter, including our modular bit error rate tester which provides a new level of scalability and flexibility for the fast paced, high speed digital market. In addition, in July we began volume shipments of our PXI vector signal analyzer. It is the world's fastest and most accurate microwave vector signal analyzer that significantly reduces test times across a wide range of applications and markets.

As you know, Keysight began operating as a subsidiary of Agilent on August 1 and we expect to complete the spinoff in early November. Our focus throughout this journey is to make this significant transition as seamless as possible for our customers. Our successful results to date are due to the hard work of our employees who are implementing a separation plan that includes working closely with thousands of customers to coordinate our shipments and delivery plans in this transition period. I am very pleased with our achievement so far.

Turning to the outlook for the remainder of the year, we are facing several headwinds in a handful of areas, most notably Russia. Our sales to Russia have represented 3% of Keysight's total revenue. The volatile political environment, as well as new export restrictions on certain product, may halt growth in one of our fastest growing regions.

Despite the geopolitical, macroeconomic, and Company separation risks, we are reiterating our second half and annual guidance. We expect the FY14 revenues to be in the range of $2.91 billion to $2.95 billion, which represents 2% core growth at the mid-point. We have tightened the range but the mid-point is the same as we have communicated last quarter.

Similarly, our expectations for full-year operating margin remains unchanged at 18.9% at the mid-point. This implies Q4 revenues are expected to be in the range of $740 million to $780 million, with operating margins at the mid-point of 20.5%. 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, orders grew 9% year over year, revenues grew 7%, and our revenue of $1.766 billion, operating margin of 19.2%, and EPS of $0.78 were all higher than the high end of our guidance. Please note that Q3 core revenue growth by segment and by geography is reported in the slide deck posted on our website.

This quarter, currency added about 0.6 percentage points to our year-over-year revenue growth and acquisitions have no material impact. We bought back $50 million of stock in Q3, redeemed $500 million of debt, and generated $28 million in operating cash flow.

This is lower than traditional for three main reasons. Number one, we prepaid about $60 million of supplier invoices at the end of July as we will not make any payment in the early part of August. Number two, we paid $29 million for the redemption of the 2015 notes, and also prepaid the current interest on that note. And number three, pre-separation expenses amounted to over $60 million.

I will now turn to the guidance for fourth quarter. We expect Q4 revenues of $1.81 billion to $1.85 billion, and EPS of $0.87 to $0.91. At mid-point revenue will grow 6.5% and EPS 10%. Our 21% of projected operating margin at mid-point will be 180 basis points higher than Q3 FY14, and 60 basis points higher than Q4 of last year.

While we are maintaining our spending discipline, we are also investing in key growth initiatives. We expect to generate about over $300 million of operating cash flow in Q4, and incur about $60 million of pre-separation cost.

Now to the FY14. The FY14 guidance at mid-point remains the same as previously communicated, but we are narrowing the range. We expect FY14 revenues to range from $6.99 billion to $7.03 billion, and FY14 EPS to range from $3.04 to $3.08. 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?

(Operator Instructions)

Our first question comes from the line of Dan Leonard from Leerink.

Great. I just want to clarify. It's unclear what your expectation for Russia is and it's unclear to me what your expectation for Russia is in the Keysight guidance. Are you reiterating that you can deliver guidance even if Russia, business to Russia halts or are you reiterating the guidance while cautioning us that Russia could drive downside?

Our plan is to deliver the guidance with the Russia halt. This quarter we saw very good revenue growth in Russia and we saw negative order growth in Russia, but we have taken that into consideration in our guidance.

Got it, thank you. And my follow-up question in the Agilent business you have a competitor which is exiting the gas chromatography market. Is there any way you can quantify what this means for your opportunity in that market either from a revenue or a margin perspective?

Agilent Technology is the leader in gas chromatography and we will do everything we can to support our existing customers and future customers as we go forward.

Thank you.

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

Just a quick question. When you look at China in total and maybe Ron, I'm thinking more on the Key side of the business, could you just speak to the tone in China and in Japan as well, and just Asia in general and how that looks over the next three to six months?

Sure. First I'll start with China. We've seen hot base station manufacturing orders and we've also seen strong orders for components. On the handset side and handset manufacturing, there's been considerable price pressure, and that market has undergone some real price erosion. But overall in China, our business looks pretty solid.

We have seen some increases on export restrictions for China, as well as Russia, and that has affected our business a little bit. With regard to Japan, the government has not been funding any new programs that we're aware of for satellites or defense work, and that has led to a continued soft environment.

And just one thought is as Apple I know we don't talk customers, but the last time there was some fairly significant share shift, it was attributed to Apple basically. And as they ramp up on the iPhone 6, is the test content into that automation and production run which they want to start in September, is the test content considerably less than it was as they ramped up on the previous generation? Or has pricing eroded to a point where it does not have as significant of an impact on the industry in general?

I'm sorry, Richard I'm not allowed to comment on particular customers' buying or test strategies.

Okay. And then let me just ask. The PXI VSA that you just started shipping; that is a benchtop instrument?

No, it's a PXI modular instrument that could be married with other instruments in a modular form factor. It could be used on the bench or it could be used in production.

Understood, okay. Thank you much.

Sure.

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

Yes, thank you. Good afternoon. Thank you for taking my questions. Ron, your 4Q op margin guidance for Keysight of 20.5% is above the high end of your market growth model that you laid out at the analyst day, and I'm wondering if you could discuss what dynamics are driving this upside? And I assume mix is helping. And then can you talk about the sustainability of this elevated margin?

Sure, well overall first of all we had predicted 8% growth in the second half, we delivered 8% in Q3, and if you look at the mid point of our guidance it's 8% in Q4. We did have very high incrementals above the middle of our guidance during this last quarter, but we do need to still invest in this multi-year transformation to get our product line growing at market and then eventually above market.

But the guidance that we just gave right now factors everything in place. Don't forget Q4 is seasonally a strong quarter, which basically when you have a significant amount of fixed cost drives higher margins.

Great. And then just shifting gears to base station shrink that you talked about in your prepared remarks, can you talk about that on a geographic basis? And when we look at LTE and TDLTE markets in China, I'm curious how this market is fairing relative to expectations, and the kind of visibility or duration that you're expecting from these deployments.

Sure. Well first of all the base station buildout is obviously 4G and TDLTE for China et cetera, and FTE for the rest of the world. But we see players in Europe and in Asia that are doing this, so when you look at some of the major players that are centered out of Europe, we see strength and then we also see strength in China and Asia in the base station market.

Any comment on the visibility or duration at this point?

Guy, I don't know if you want to add any comments on that at this point?

Well the only thing I could add on is the fact that especially the pre-operators in China are now starting to deploy 4G, so that's the trend that is going to be here for probably a few years, but with ups and downs as the capacity will have to build.

Thank you for taking my questions, good luck.

Thank you. Our next question comes from the line of Isaac Ro from Goldman Sachs.

Good afternoon guys, thanks.

Hi.

Bill, wanted to start with the LDA side. It looked like the order growth on the core business there was really solid and wanted to kind of get a little bit more color from you on the product specifics there. It really seems like you guys are taking at least a little bit of market share from your competitors just given their growth rates versus yours, it would be helpful to see a little bit of color on where you think you're doing the best.

I'll give an overview comment and then turn it over to Mike and Fred to comment in their respective businesses.

But my first warning as I've always had is you really have to look the overall performance in the marketplace as a rolling four quarters, and again, we're very happy with the performance in Q3. And I'm particularly pleased with the rebound from Fred's business from last quarter. If there was anything in the last quarter that we had, is that the growth in revenue and the Life Science side was below expectations. So that's really the story from my mind, is that we've got great order momentum across all of Fred's product lines going forward. I'll have him comment on that.

And of course Mike's business just continues to roll along. We are the leader in the applied side of the market. We have a lot of competition his people see that, but his team is just doing an outstanding job of holding, and if not growing positions. But I'll turn it over to Fred, and I'm going to flip the order, go to Fred, because it really is the biggest change sequentially, and then turn it over to Mike.

I think we are very pleased with the results we are seeing from all the platforms, almost across the board. Starting with on the top line, the LC/MS growth rebound quite significantly over the last four to five months after a pretty difficult FY13. And so we are confident that the new products are really pushing our business forward starting with the new triple quad which we have introduced at ASMS. And also the single quad which we introduced as keeping up very well against the competition. By the way, really nice growth there.

Secondly, we are seeing infomatics as a key element, and as we have talked several times about it increased investments there infomatics is really growing. Along with that, and is pulling instrumentation with it. And sub pieces in the classical instrumentation piece is the LCs, which are growing nicely as well from a revenue perspective.

And turning to the pieces, actually Mike owned but assigned to the Life Science business, consumables and services were strong as well. So turning over to the genomics and diagnostics space we saw really significant growth in the genomics space, predominantly driven by the target enrichment of the sample preparation for next generation sequencing. We saw solid growth in the space of pathology, mainly driven as Bill said by the IQFISH with a few things we have introduced there which are a real significant advantage from a customer's perspective.

And we also saw the companion diagnostic rolling at the rate we are either expecting. And finally, the companion diagnostic, also as Bill said, the contract will not be assigned, but we are seeing an increasing demand on companion diagnostic, which is in line with what we are seeing in the market in general.

That's helpful, thank you. And just maybe one other if I may, on China. You guys mentioned some of the changes at the SFDA, and now that that's behind us can you maybe give us a sense of what's baked into your outlook for China both in LDA as well as EMG for the balance of the year? Thank you.

I'm going to turn it back to Mike who might answer the first question because, again he's got a great story on the applied side from market perspective. And then our China business for LDA was flat again Asia was up 4%, Japan down a little bit, China flat, and so we obviously had a very strong non-China Asia performance.

I'm going to have Mike talk a little bit about his products and comment on China, because a lot of his business is in China, but our China business was flat for LDA in the context of an overall strong Asia that was up 4%, obviously China dominates that performance. And after Mike answers, I'll have a turnover to Ron to talk about China specifically for Keysight.

Thanks, Isaac for the earlier question. So first of all, building on Fred's commentary about the drivers for a quarter which we're very pleased with in terms of both the revenue and the incoming order rate. We saw this strong services and consumables performance in this CAG segment space for Q3. But we're also seeing the growth being driven by the new product introductions we have been making over the last several quarters and in the past year. So from our introductions in the mass spectrometry area on GCMS, ICP-MS.

And as you saw in the earnings call we finally get one other what I believe to be an award winning product in the spectroscopy area, so we saw strong growth in our mass spectrometry business both gas phase and inorganic side, as well as our base spectroscopy business. So the innovative products we're bringing to market are truly driving growth.

And this was in a environment where we had a challenged market situation in China, so I think it's fairly well publicized. The Food Ministry's reorganizations are under way. I think it's taking longer for those to settle out and for them to get organized and really get the procurement side going in terms of the new purchases. So we were delighted with the results of these type of growth rates and in a market as Bill described was relatively flat in China. Ron?

As far as China, our revenue growth was a little bit over 20% for the quarter, but our order growth was 5%.

Got it, thank you.

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

Thanks, good afternoon. Mike, just back on that same question. Could you give us a sense of how orders performed in China in the period, if there was any delta between the revenue experienced and the order experienced?

Thanks Brandon for the question. So slightly better view about 2% order growth in Q3, and we'll again reemphasize the long-term growth prospects in China remain strong. And we see some of these challenges we're seeing right now in the food market, it's just really kind of a temporal thing as they get their agencies organized. But a slightly better view on the order growth rate. But I'd also say we finished the quarter very strong in China.

Thanks. And then one more for Bill or Didier. Is there an opportunity for share repurchase activity to accelerate for LDA post spin here going forward?

Our stated strategy to date as we have talked about is to first of all ensure that we keep our bond holders whole and reduce the debt to ensure that we can maintain our investment grade. We're also committed to making a dividend payment of $130 million, which we believe will be roughly the same percentage dividend as what it was before under Agilent.

Stating that, the new Agilent is very, very profitable and has very high cash flow. Our priority continues to be to look on ways to invest in the business. But I've been very clear that we have to digest a lot with the separation the acquisitions that we have made, and we will continue to work with the Board of Directors to figure out the best way to return cash back to our shareholders.

Super, thank you.

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

Good afternoon guys. Maybe Ron starting on the sort of base station and more so focused on the US business, seemed like a number of peers called out weakness in a number of the large carriers here. Could you just maybe talk about what you've seen from demand base from those folks, and maybe how your business differs from some of the others where they've seen weakness like in the business you sold to JDS?

Sure. Obviously we have a major difference in what we do in communications where some of the competitors obviously look at network monitoring and features that are basically I'd say software testing of higher levels. We're testing R&D and manufacturing processes, so that is a significant difference. But I'll let Guy add a little bit of color commentary.

Yes, Ross, I would add that we have a very strong position in R&D and manufacturing with all the infrastructure OEMs, base station builders. And as this market has been strong in Q3, you see the results in our wireless numbers.

Great. And maybe just Didier, quickly on the cash flow, I know some of the moving parts for the quarter. But can you just remind us some of the key headwinds of why this is sort of a sub par year on cash flow versus what we would be used to given the sort of top-line profit results?

Yes, on the year-over-year basis, most of the reduction in the cash flow from 2013 to 2014 will come from the separation costs about $180 million and that redemption cost, there's pluses and minuses. Also we are ending the year, we are planning to end the year very, very strong, and even though we have best-in-class DSO of about 47, 48 days, that basically last year we had positive impact on receivables. This year we just need to -- we are building receivables, we are planning to build receivable at the end of the year to support basically the much higher revenue growth expectation. And again, we have best-in-class DSO so there's no deterioration of DSO. It just applied to higher revenue in Q4. So those are some of the main things.

Got it, thank you.

Our next question comes from the line of Dan Arias from Citigroup.

Good afternoon, thanks. Just a question on the improvement in the academic and government spending. Was that a late quarter phenomenon, or did you see pretty steady improvement through the quarter? Just trying to get a feel for the pacing there a bit.

Good, Fred, why don't you take that one please.

What you're seeing is an internal rebound in the different geographies. I think the business is coming back honestly on the easy compare relative to last year.

I just can give you a few numbers, worldwide academic research spending is pretty much flat in Europe according to our information. China is spending about 12% gross in government funding, however all to the things Mike was highlighting, this picture is the start so that probably some of the money is spent towards the later part of the year. And the US is growing in about 2%. So overall I think it is the situation that we can say there is a relief in this market overall, and we are seeing that in our order pattern as well.

Okay great and then just curious what you're seeing in large pharma? You guys had called out spect in mid size companies as being strong, but I think last quarter, it sounded like order patterns had been disrupted a bit. So I guess as the big deal speculation dies down a bit are you seeing things loosen somewhat or not really?

That's a good question. We still see big pharma still not loosening their budgets completely. We are done seeing the big deals we have seen in the past. I think the growth, as Bill has outlined, is coming off of mid to small companies. I mean the reason for that is they are still in a situation potential consolidation going on, but that's also the pattern play for small molecules, even that is almost over.

And we are seeing a new trend in Europe for example, that traditional companies are starting generic businesses after a lot of that business has been moved to India. And this helps of course the pharma market in general. But your specific question about big pharma, I would say this is not yet completely there.

Okay, thank you.

Our next question comes from the line of Doug Schenkel from Cowen and Company.

Good afternoon and thanks for taking my questions. Just a quick clean up on the China dynamic. Would you be willing to quantify what percentage of total sales is exposed to this government related, as well as the China FDA reorganization challenges in China?

I'll give you an opinion. The problem as you know in China is what do you define as government and what do you define as private. Because technically all of the big chem companies even though they're held as a company are effectively owned by the government. So I think that from our perspective and where Agilent is essentially all of the issues are related to impact of government decisions.

So it's really the vast majority of LDA China sales?

And I'm again defining anything the government effectively controls the investment strategy is effectively government owned.

Okay.

And again, if you look at it the food industry, the pharmaceutical industry, and the chemical industry is all highly government impacted, and so they really do make those fundamental decisions at the end of the day. So if you take our definition, then it is essentially 100% driven by government decision.

Okay. And then I just wanted to I guess follow-up on that by asking I guess on one hand it doesn't sound like you're expecting that to come back in Q4; on the other hand at the end of last quarter you talked about strong order momentum in China, you said that again I think this quarter.

I believe you typically don't count something as an order unless you expect it to be fulfilled within about six months. So I'm just trying to reconcile these seemingly contradictory dynamics. And if my understanding is correct, are you trying to basically say that you do expect China to come back, but it may not be this quarter, it may be say Q1 of next year based on what you're seeing from an order standpoint?

I think that all of us are in the conventional wisdom that or conventional view of thought that organizational changes are relatively straightforward and that China continues to be the country with the greatest growth opportunities that we have. Every quarter you're a little bit disappointed, and I think as Mike said exactly right, we're confident in the future. You just never know how the funding breaks and you see that in the defense business and Ron's business.

So I think we're in the position of the guidance that we have is our best forecast of what's going to happen in China, so we're not expecting obviously any miracles and we'll just have to play it out.

The good news is, is that in Asia overall our business is pretty good. In other parts of Asia, we've been quite successful and we'll keep our fingers crossed, and hope that Q4 the bottleneck breaks and we get stronger momentum going into 2015.

And one last one. You've been tracking a bit ahead of plan thus far this year. If we think about that in the context of what you talked about in terms of dis-synergies on the new Agilent side going back to your March analyst day, has the fact you've done a little better than expected provided you any opportunity to maybe pull some of that required investment forward and maybe benefit you from a dis-synergy standpoint next year? Thank you.

It's actually working the opposite direction. Ron and the team and our whole corporate team is doing so well for them to become independent, it's that we have the risk of increasing the dis-synergies, and again by dis-synergies just meaning there's more residual left over at Agilent to be able to manage through; however, and you see based on our buying down our debt, we are still quite confident that first order dis-synergies and the new Agilent going forward will be offset by lower interest payments.

Our next question comes from the line of Jon Groberg from Macquarie.

Hi, thanks a million for the questions. So can I just spend a minute on gross margin? I'm wondering if by each business by LDG, by chemical, and by EMG, just looking at absolute revenues. I know for you guys given the mix of business and the instrumentation, never occurred whether to look year over year or sequentially, but if I just look at absolute revenues in LDG and in EMG in particular, you're still not back to kind of gross margins that you were at previously, chemical doing a little bit better. So can you maybe just talk about gross margin trends by business, and kind of where you're at in your journey there?

I'll have Ron start on the Keysight, again, obviously a lot of mix impact depending on what type of deals he takes, and then we'll talk about the LDA going forward.

Yes, that's exactly right, but I'll let Neil give some color commentary.

Yes, so I would echo exactly what Bill just said. So as we move from quarter to quarter, the mix of our products, the mix of our sales has a pretty significant impact on our gross margins.

And the other point that's certainly relevant as Ron mentioned in the script is the price erosion that we see in certain markets, most notably in the wireless manufacturing space. Over the past several years, if you're looking at multiple year trends has impacted gross margins.

I'll just make some high-level comments, again Jon, if you have additional details, the guys can give an answer.

But LDG is by far the most competitive market that we have. I mean our base comes from the applied. I think we continue to make great progress in Life Science and Diagnostics, the overall gross margin is solid, I would say very, very competitive in the market. But it is the most competitive market that we have moving forward.

We have to win, I'm absolutely convinced this will continue to be the long term growth engine of the Company, but this is where the investment is, this is where by far the most competition is. Fortunately on Mike's team on the applied side continues to do a superlative job, and you can really see the investment we have made in spectroscopy, and again I alluded to it and I'll put the plug in. We have systematically redesigned every Varian product line that we've received since 2010. And so the NMR as we said in the past, which is counted in Fred's gross margin is behind that. We've introduced one product but we really have to turn the product line one more time.

But spectroscopy, we're basically done, and not only did we spend the money to do it right. Secondly, the market sees it. We're winning the awards that indicate how successful we have with the Varian engineers working together with the Agilent engineers to really develop a great product. And so I think in summary, I think the differential change has been the progress we've made on the spectroscopy side.

I guess just to follow up quickly on that, Bill. Thinking of LDA overall as you go forward, my question was around you highlighted that there are a lot of opportunities on the gross margin side there given particular some of the product lines that you just mentioned from Varian. Has anything changed in terms of what you think the potential of that could be over the next two to three years given what you're seeing roll in now, or is it going to take a little bit longer, or is everything on track? I'm just trying to understand the timing of these improvements.

Everything is on track and you should assume a 1 percentage point improvement per year.

Okay. And then if I can quickly, Ron, can you on the electronic measurement side, I know the way a lot of people have reported, and it's always hard as you already alluded to in earlier comments to compare one company to another depending on their mix and other pieces of business, but you guys obviously have a lot easier comps than others did in terms of what they were doing a year ago, you had some customer losses and things like that. I guess how would you just overall describe the environment and the overall test and measurement market, putting aside all of these individual Company issues? Just give us a sense of how you describe the overall market, thanks.

Sure, I'll just break down by some of the segments. The semiconductor market looks good as they move to sub 20-nanometer pitches. The industrial market looks relatively flattish. The computer market itself is not growing very rapidly from all of the tablet conversion from PCs. In communications we are seeing a buildout of the infrastructure in base stations and that certainly helps as people move over to 4G, but there is massive handset manufacturing test pressure on pricing as more people have entered into the market and people have been very, very aggressive on pricing, that really affects the attractiveness of that market.

In aerospace defense, as we saw a nice rebound, the 13% growth in this past quarter, that's from a free up from some of the spending that we saw last quarter, and we expect to continue into Q4 with the end of the US fiscal year.

So overall on the markets, what we had talked about last year, we see communications a little bit better than the 2% growth that we outlined last quarter for FY14. We see also the aerospace defense doing a little bit better than what we had outlined, but we do not see the industrial and computer segment tracking to the 5% that we outlined.

So two segments are a little bit up, one segment is down, and net-net that gives us to our 8% growth for the half.

That's helpful, thank you.

We believe the market growth for next year will be in the 2.5% to 3.5% range, and we're trying to get back to that growth rate.

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

Hi guys, this is actually Bryan Kipp on behalf of Paul. Thanks for taking the questions. First one, I just want to piggyback on an earlier question on the specialty pharma growth. What's really underlying that? I mean there's been commentary that there's been an uptick in India, and I wonder if that's supporting some of the growth there? And is it additional products that you guys are seeing, is it focused in one area in one vertical for your business or is it multiple? Just color on that would be helpful.

I think we are seeing as I said before we are seeing pharma in general, the big pharma is probably more restrained than the smaller ones. I think the product portfolio we have at the moment is really ideally suited at this point in time to enter this market.

I think with the new introductions in the LC space and in the LC/MS space, I think we have made in-roads in that and the driving force is increasing productivity. These are the reasons why customers even under tight pressure are deciding to move on to purchase instruments in these times.

And I think particular in India, I think we are seeing an uptick, the growth in the market. Overall, we are seeing the total market is probably a double-digit market growth at this point in time, and so we are hoping and optimistic that the big pharma spending starts continuing towards the end of this year.

Okay. And you think the tail for the specialty pharma investments especially the 11% you alluded to in India, you think that has some longevity to it? And I guess in addition, I think there was a question on pacing for academic and government, especially in Europe. How do you guys see that pace throughout the quarter? I know you said rebound overall, but did it get stronger month over month?

Oh, the rates, yes I believe even so that the spending as I said before is relatively flat. I think the budget is released and we are seeing continuous investments being made by the institutions. And just one fact in Europe, the European parliament has just released a fund of about $5 billion for the next 10 years for bio-related research.

Okay. And then Mike, if I can do a quick follow-up. I know US refining capacity has been pretty strong to start the year. US as I think you guys have alluded to has been not robust but has been a steady grower for you all to start the year, hasn't been too crazy. Color around that.

And then I didn't see anything on the Middle East. Is that starting to fall off a little bit or being more flat or are you still seeing support there?

Great question. Thanks for the opportunity to provide additional color so let's maybe start with the Middle East. That part of the world continues to be a very strong growth region for us. They're investing in capacity in country trying to move higher into the value chain of refined products, so that area is growing nicely for us.

And in the US, I think the commentary is still relatively the same as last quarter which was overall the industry has probably never been healthier in the US fueled by the low cost of fuel stocks from the shale gas, and we're seeing a plan by our major customers to add infrastructure, build capacity. That hasn't yet come on line and translated into new business.

So the business is still a steady grower but I think as the proppant continues to grow and invest we could look to a healthier investment environment for us down the road.

Appreciate it.

Our next question comes from the line of Derek de Bruin from Bank of America Merrill Lynch.

Hi, good afternoon.

Hello.

Actually, I sort of have a mechanics question and just sort of looking more in terms of how you're going to report fourth quarter. And I just want to make sure I understand, so you basically said you're just going to report the Agilent LDA business as it sort of stands and no commentary in Keysight, is that correct?

No, we will report Agilent results with Keysight in Q4.

Okay.

We will discuss in the earnings call the new Agilent going forward, and Ron and team will have a separate investor call afterwards to talk about the results of Q4 and their guidance for FY15.

Okay.

So for Agilent no change except that obviously in terms of our financial report, but obviously the focus of the presentation will solely be on LDA. And then on the within the same time about Keysight will present their financial results and provide their report on their business separately from Agilent.

Okay, great just want to clarify that. So Ron, you'd mentioned some strengths in the single quad market. Is that the new 6120 that you're talking about?

Exactly.

And I mean that goes against you're targeting that for the chromatography market and that's going against one of your competitor's product the QDA on that. Is that wins against that product in that market or just a little bit dynamics of what you're seeing, since that's obviously a new sort of instrument for that chromatographic researcher standpoint.

I think that's actually a good question. I think we are winning against our competitors at the moment, particularly the product you are referring to just by the fact that our product is more universal, useable, and is more flexible in the application space. It can be deployed, and I think that's the major difference between the product, which actually is also from a price perspective very competitive. And I think those two factors are driving the growth in the total single quad market, but also particular against this instrument.

Great. And I guess is this driving new system placements for LC as well?

I would say it's driving also new instruments in the LC space, particular where these single quads are used in more routine applications [pharma]. This is one of the reasons why we are seeing in the small pharma space, small company pharma space, we are seeing these growth rates.

Great. And then just one quick question. On the PD-L1 ligand, the companion diagnostic, I've had a number of questions from investors about how to think about the size of that market and that opportunity for companion diagnostic. Can you give some color around that? And relate that to maybe what your experiences were with --

Sorry, good question as well. I think it is very difficult to say how big the market is because there is no real commercial product at the market at the moment. At the moment Agilent is providing development services for products which are not yet on the market and I think this is the value proposition at this point in time. However, once those products -- I talk about the pharmaceutical products, make it through the value chain, I think then we can talk about markets. This is why it's very difficult at the moment to assess that.

Again, as Fred said, just look at it as a service opportunity that we're providing services. And the big pay off is if we're lucky enough to and skillful enough to partner with somebody that is able to deliver a differential product in the marketplace, we will get the additional revenue supporting those reagents and instruments.

I mean just one anecdotal information. If you look to the development of new drugs at the moment, and I think a big part of the drugs and if you correlate that to the success of the drugs in the clinic trials is correlating with companion diagnostics, which is co-developed basically with a drug itself. And I think this is the opportunity afterwards beyond the service business as Bill just said.

Thank you. Our final question for today comes from the line of Tycho Peterson from JPMorgan.

Hi, thanks. Ron, I'm wondering you mentioned revenue pull forward for Keysight ahead of the official go-live date on August 1. Is there any way you can quantify that?

Yes, so it was approximately $15 million which would have put us right around the mid point of our guidance.

Okay. And then is there any chance you guys might be willing to comment at all on 2015? If we look the Street's at I think 5% core for LDG and 5.5% for EMG. Ron, you just talked about the market growing 2.5% to 3%, so as we think out for next year, any preliminary thoughts?

We're going to have to wait to next earnings call before we give the 2015 guidance moving forward. And also I think it's important, not speaking for Ron, but working with his new Board to make sure that everyone is aligned for their guidance in 2015 and likewise with our Board.

Okay. And then lastly, you explicitly in pathology talked about Europe being strong. Can you maybe just talk to the dynamics there and then what was going on in the US and is there a reason that wasn't called out too?

In terms on the LDA side you mean?

Correct.

Well, I'll have Fred, clearly the expert in Europe, so I'll have Fred talk about again this continued strength that we have in Europe both from a product standpoint and a customer standpoint.

You see tremendous tick up in our sales in Europe, and it is mainly driven through the product categories I have been talking about. And it's across the market, so including Mike's markets as well. And we see the academic element for the reasons I have given before, so ticking up. And I believe it is the pharmaceutical industry which drives growth, even though we don't see the full potential yet. So I'm optimistic that this trend really continues.

Fred, this is Mike. If I could maybe just build on your comments and maybe add a geographic perspective. Within Europe we often think of Europe as being Western Europe, but if you look to what we call the IDO or the Eastern Europe part of our business is actually growing quite strong as well. So there's both a economic geographic dimension sort of under the covers if you will in our European numbers.

Okay, I'll leave it at that, thanks.

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. And on behalf of the management team and myself I'd like to thank everybody for joining us on the call today. If you have any questions please call us at IR and we would be happy to get back to you, 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.