Agilent Technologies, Inc. (A) Q1 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Agilent Technologies Earnings Conference Call. My name is Derek, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to Ms. Alicia Rodriguez, Vice President of Investor Relations. You may proceed.

Thank you, and welcome, everyone, to Agilent's conference call for fiscal year 2011. With me are Agilent's President and CEO, Bill Sullivan; as well as Senior Vice President and CFO, Didier Hirsch. Joining in our Q&A will be the Presidents of Agilent's Electronic Measurement, Life Sciences and Chemical Analysis Groups: Ron Nersesian, Nick Roelofs and Mike McMullen. After my comments, Bill will give his perspective on the quarter and the overall market result. Didier will then follow with a review of financial results. And after Didier's comments, we will open the lines and take your questions. In case you haven't had a chance to review our press release, you can find it on our website at www.investor.agilent.com. Please note that the business segment financial tables are in the schedules that accompany the press release. We are also providing further information to supplement today's discussion. After you log on to our webcast module from our website, please click on the link for supporting materials. There, you will find additional information, such as our revenue breakouts and historical financial information for Agilent's continuing operations. If during this conference call we use any non-GAAP financial measures, you will find on our website the required reconciliation to the most directly comparable GAAP financial metrics. We will make forward-looking statements about the future financial performance of the company. This involve risk and uncertainties that could cause Agilent's results to differ materially from management's current expectations. As a result, we encourage you to look at the company's most recent filings with the SEC to get a more complete picture of all the factors at work. The forward-looking statements, including our guidance provided today during the call, are only valid as of this date, and the company assumes no obligation to update such statements as we move throughout the quarter. Before turning the call over to Bill, I would like to remind you that Agilent will host its annual analyst meeting in New York City on March 3. Details about the meeting and webcast will be available in the coming week on the Agilent Investor Relations website. Now let me turn the call over to Bill for his comments.

Thanks, Alicia, and the hello, everyone. Agilent's Q1 orders of $1.63 billion were up 33% year-over-year, while revenues of $1.52 billion were up 25% from a year ago. Without the impact of the Varian acquisition and recent divestitures, orders and revenues were up 22% and 19%, respectively. Overall, financial results were excellent. Non-GAAP EPS is $0.60, exceeded expectations and straight consensus. Agilent continues to demonstrate the strength of its product portfolio, as all key platforms grew revenue by double digits for the third consecutive quarter. All regions posted double-digit organic revenue growth. Our Electronic Measurement business posted its second consecutive quarter with a 20% operating margin. Q1 revenue of $771 million reflects 23% year-over-year growth. Excluding the Network Solutions divestitures, orders and revenues both grew 31% organically. We saw continued strength and momentum across markets and regions. Aerospace and defense revenues grew 11% organically from a year ago. Communications markets were up 45% year-over-year, driven by our industry-leading position in the LTE and 3G test solutions. Industrial semiconductor computer markets grew 31% organically, led by our oscilloscope business. Our scope revenue is up 70% year-over-year. Tomorrow, we're introducing a new family of value oscilloscopes, which have the best price performance in the industry. These 26 new models of 70 to 500 megahertz scopes represents the largest ever oscilloscope introduction. In our Bio-Analytical Measurement business, we saw a gap between orders and revenues in our Q1 results. During the quarter, we started the process of transforming Varian's quote-to-cash process to the Agilent system. As a result of issues related to end of month pipeline logistics, revenue for Varian-based products came in at $30 million below expectations for the quarter. Life science and chemical analysis were both impacted by the revenue shortage. Life Science business revenues were up 19% to $404 million, up 7% organically. Orders grew 11% organically. Operating margin, including Varian, was 12%. We saw strong growth in Academic and Government, with 12% organic growth driven by year end budget spending. Pharma and Biotech was up 6%. Life science platform performance were strong, particularly in LCs and Mass Spec. We're seeing acceleration in instrument replacement cycle. We also strong demand for our genomics, open lab informatics, automation, NMR and MRI products. The Chemical Analysis business saw revenue growth of 43% to $349 million, up 8% organically. Orders grew 16% organically. Operating margin, including Varian, was 19%. All market segments demonstrated solid organic growth, led by petrochemical, up 12% year-over-year. Momentum in the U.S. is being driven by replacement business from recovering industrial markets, as well as by food safety and alternative energy programs. From a product perspective, we saw double-digit revenue growth in GC and GC/MS. Moving on to Agilent, our backlog increased by $100 million during the quarter, the seventh consecutive quarterly increase in our backlog. Our number one priority is to increase manufacturing capacity in Q2 and throughout the rest of the year. For the second quarter of 2011, we expect revenues in the range of $1.59 billion to $1.61 billion. Non-GAAP earnings are expected to be in the range of $0.63 to $0.65 per share. We are raising our overall guidance for 2011. For the full fiscal year, we expect revenues in the range of $6.3 billion to $6.4 billion, with earnings per share in the range of $2.53 to $2.63. Thank you for being on the call. Now I'll turn it over to Didier.

Thank you, Bill, and hello, everyone. I will start by providing some additional color on our first quarter results, and then comment on our outlook for the fiscal year and for Q2. As in prior calls, all my comments will refer to non-GAAP figures. So starting with Q1 results. As Bill mentioned, Agilent is off to a very strong start to the year, with an excellent first quarter performance. Orders of $1.63 billion, up 33% from one year ago, both in dollars and local currency. On an organic basis, orders increased 22% year-over-year, and all three business segments generated double-digit order growth. Organically, orders grew 18% in the Americas, 11% in Europe or 17% in local currency and 33% in Asia Pacific or 29% in local currency. Orders for the ex-Varian products and services were close to $190 million, reflecting planned revenue synergies. Revenues of $1.52 billion were up 26% year-over-year both in dollars and local currency or 19% on an organic basis. By region, revenues grew organically 24% in the Americas or 23% in local currency, 11% in Europe or 16% in local currency, and 21% in Asia Pacific or 17% in local currency. Organic revenue growth percentages in China and India were in the high-20s. As Bill mentioned, revenues for the ex-Varian products and services, $134 million, were $30 million short of our expectations. Moving to the income statement, first quarter non-GAAP operating profit of $270 million improved $89 million from one year ago on the $311 million increase in revenues, a 29% operating margin incremental. Excluding Varian, our operating margin incremental was in line with our 30% to 40% commitment. As guided, operating margins of 17.7% were slightly down sequentially due to the December salary increase, front loading of stock-based compensation and the increase in payroll taxes due to the disbursement of the second half fiscal year '10 variable and incentive pay. Delayed hiring and spending offset the negative impact of lower-than-expected revenues. Interest expense was down $4 million sequentially, as we paid back the $1.5 billion World Trade debt in December, two months before it matured. Moving to taxes, we have adjusted our non-GAAP tax rate down to 18%, mostly to reflect the extension of the R&D tax credit. Non-GAAP net income of $212 million or $0.60 per share compares to a $135 million or $0.38 per share one year ago, an increase of 58% year-over-year. Turning to the cash flow and our net cash position. Total cash from operations during the seasonally low first quarter was $120 million, an increase of $90 million from one year ago. This was achieved even as inventories were up $81 million in response to expected revenue growth and the Q1 revenue shortfall. During the quarter, we received $136 million from employee stock programs and repurchased $270 million worth of shares. We will continue the present buyback program intended to keep the basic outstanding share count at roughly $346 million shares. With regards to net cash, we finished the quarter with net cash of $554 million. Now turning to the fiscal year 2011 outlook. We are raising our revenue guidance to reflect Agilent's strong competitive position in all of our core product line and across all regions. We now expect revenues for fiscal year '11 of $6.3 billion to $6.4 billion, which at the midpoint of the range represent a 16% year-over-year revenue growth or 12% on an organic basis. EMG, 14%; LSG, 10%; and CAG, 9%. Consistent with our 30% to 40% year-over-year incremental reporting margin commitment, we're also raising our EPS guidance to $2.53 to $2.63 based on 356 million diluted shares. This higher guidance represents a 29% year-over-year EPS growth at the midpoint of the guidance. There's no chance to increase commitment to generate $100 million of net Varian cost synergies within three to four years, with roughly 50% of the savings flowing by the fiscal year '11. Finally, moving to the second quarter guidance. We expect Q2 revenues of $1.59 billion to $1.61 billion and EPS of $0.63 to $0.65. At the midpoint, year-over-year revenue growth will be 26% or 15% on an organic basis. The midpoint of our EPS guidance corresponds to year-over-year EPS growth of 49%. With that, I'll turn it over to Alicia for the Q&A.

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

[Operator Instructions] And your first question is coming from the line of William Stein from Crédit Suisse. William Stein - Crédit Suisse AG: Guys, you talked about a $30 million delay related to supply chain, it sounded like. Can you dig into that a little bit, explain to us what happened, and in which segments the revenue was affected?

Again, well, it was not supply chain related in a classical sense. It was related to the logistics of the conversion to the Agilent quote-to-cash process. We had $30 million of shipments that essentially revenue was not recognized. $20 million of that was in Chemical Analysis. $10 million of that was in our Life Science business. William Stein - Crédit Suisse AG: And you also spoke about the full year revenue guidance, and I think you briefly touched on the growth rate by segment. Can you please go through that again, and maybe on both organic and all-in basis.

Sure. So I provided the detail by segment for the midpoint of our guidance. So the midpoint of our guidance is $6.35 billion. And on an organic basis, organically, that corresponds to EMG growing 14% organically, LSG growing 10% organically, and CAG growing 9% organically. William Stein - Crédit Suisse AG: And one strategic or more kind of operational question I guess, is around your position in 3G and LTE test. I know that over the last couple of years, your position in the handset manufacturing test has eroded a bit. I know you announced some new products in that area, and you talked about it being strong in the quarter, I think. Can you elaborate on what the product plans and your anticipated success in the future in that market is?

As I noted, we had a very strong quarter with 45% growth in LTE and 3G, and I'm going to have Ron describe what our product position is in LTE, as well as the overall market. Ron?

Will, this is Ron. There are 17 different product lines that we have participate in the LTE ecosystem and the ecosystem for 3G. So sometimes as brought out there that there's one product or two that makes all the difference. But it's a broad spectrum of products that we have from design simulation software to semiconductor parametric testers to test the chips, to component testers to test the components, the signals sources, signal analyzers, design validation scopes, digital RF analyzers, one-box testers, pre-conformance systems, power supplies, calibration testers, verification testers. So the list goes on, but the reason why I've been this up is we have a very broad portfolio. And as Bill have mentioned, we grew 45% in our communications business. And our position is number one in 2G, 3G and in 4G wireless.

And during our analyst call in March, I think you'll be pleased that Ron and the team have dug up 10 years of data for final cell phone testing. And so we're going to show you that on March 3, and it will be quite interesting to see, at least from our viewpoint just what one segment of the overall market is, again, the handset final test.

Your next question comes from the line of Ross Muken from Deutsche Bank.

How do we think about the margin progression as we head into the quarter? I mean, obviously, a lot of moving parts by segment, particularly with some of the revenue pull-through, which we didn't have Varian. How should we think of that in terms of the evolution, particularly on the Life Sciences and Chemical Analysis pieces where we saw the sequential declines here?

Yes. I mean, as you know, we're not providing guidance by fall of the different lines of the P&L, just the top one and the bottom one EPS. But we are projecting midrange of the guidance our EPS to grow $0.60 in Q1 to $0.64 in Q2. Obviously, with the help of the healthy revenue growth as per our guidance, the other thing that you will see is that on one hand, we had one-time items in Q1 that will not impact Q2. On the other hand, in Q2, you will see an increase in general in cost and expenses every single year it's a normal seasonality factor during Q1. Expenses tend to be fairly minimal because of the significant break. And in Q2, they start going up. So you have those two factors also in Q1. We had two months of salary increase, and in Q2, we'll obviously three months salary increase effective December 1. So you have all those factors. But altogether, along with the increase in revenue, the result in EPS going up $0.04 at midpoint of our guidance.

Our gross margins will in fact increase, and I will just assume that it will be somewhere between our Q1 actual and our Q4 of '10. And as you may recall, the gross margins of our Varian products tend to run lower than the Agilent product line, and of course, we're in the process of fixing that discrepancy.

Just quickly in terms of the emerging market growth. I mean, you have got some pretty substantial growth both in China, India, et cetera. As we look at sort of key product areas in those regions that are having the most success, maybe it's easier to look at it based on sort of end customer market, where are we seeing the most substantial demand particularly in those end markets?

I'm going to have Ron comment. If you look at actual performance in Q1, the growth in Asia was driven by EMG. LSG and CAG growth was impacted because of the below-expected revenue. But I'll have Ron comment on his growth in Asia, which was 33%. And also, Nick I think also had less impact of Varian had a strong growth in Asia as well on the LSG side. So I'll have those two group presidents comment. Ron?

If we look at orders, orders in Asia Pacific were even strong in EMG with 49% order growth, and that was really driven by the wireless ecosystem, the wins that we're starting to have for LTE, as well as for the Smartphones rollout that was in 3G. China was extremely strong, and we continue to build very, very strong momentum there.

This is Nick. I'll just add. Our Asia numbers in orders were really strong double digits. Even Japan had decent numbers. We did have most of our trap revenue problem show up in Asia revenue. So that's where we're most impacted by our actual logistics problem for revenue in LSG.

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

Can you just clarify on the $30 million shortfall, is that just a delay, or is that a shift of all the Varian's revenue given the conversion to Agilent's quote-to-cash system.

It's just a delay, Jon. We just basically run out of time. Our processes are quite a bit different than Varian. Again, the team did, I think, just a superb job of converting to our quote-to-cash that our customers now see us as one company. But quite frankly, we just ran out of time, and the $30 million was trapped either shipped to non-invoiced or trapped in our logistics centers and not fully shipped or recognized by the customer. So you just expect that will obviously flow throughout and hopefully it's already flown out or have transferred out as we speak moving forward. But clearly, our expectations for the quarter were below by that $30 million. Unfortunately, we had a higher, more favorable mix of the older Agilent product and very well controlled spending, which resulted in solid bottom line performance.

So just to be clear, in the second quarter, you'd expect to recognize all that $30 million in addition to what you were anticipating previously from Varian?

That's correct.

And then just another question on revenues. You don't have a ton of backlog at least historically. I know it's higher right now. But, I guess, what do you see out there in the markets that gives you the confidence for the full year to raise the numbers like you did?

I think I'm going to have each of the presidents talk in terms of their view. But there is no evidence whatsoever of a fundamental slowdown in capital purchases in any of our nine major market segments. Obviously, some concern long term in aerospace and defense, and everyone continues to look at the semiconductor market, but of course, that can be offset in a lot of the other spaces. So I'm going to start off with Ron and Mike and Nick just to talk a little bit about their end markets and why today we think that 2011 has continued to be a strong year.

If you first look at the communications market, as Bill have mentioned, our orders were up 45%, and that's driven by the rollout of smartphones, tablets and other computers. And the results there are strong. And also, the demand that we have, we have seen no slowdown. As a matter of fact, we have customers asking for more products than we can deliver, and that's why our backlog continues to go up, but the demand is strong. Another area in the general-purpose market is the computer market. And as we look at our Oscilloscope business, it's exceptionally strong. Bill had mentioned that we have 70% revenue growth in oscilloscopes, and you've seen some of the competition report some good growth numbers. But I think our 70% growth is very, very strong. A matter of fact, on top of that, our order growth in oscilloscopes was over 90%, and that is not only strong. As Bill have mentioned, during the next 24 hours, we are rolling out a family of 26 products to bring the technology and capability from our technology design centers and new ASICS from our technology development in Agilent Labs and A-to-D converters to bring out an exceptional family of products that will complement the strong growth that we've already seen. So we see it on the product front and we see it on the end market front. And as Bill have mentioned, the only caution is the aerospace and defense market, which we're not expecting its growth to be as strong as the other segments. Mike?

Sure. Let's start geographically. So we're seeing -- as we reported very strong growth across all major geographies, but the business is still being led geographically by our Asia growth. And as we've shared with you earlier, we believe our footprint is really solid in Asia to capitalize on the long-term growth opportunities. And we see no slowdown coming in FY '11. If we look at some of the market subsegments, chemical and energy, we're seeing very strong replacement spend in places like the U.S. and Western Europe. We're also seeing movement in the research area, as we pointed to, for example, in the area of alternative energy research funding. So good core replacement demand in the QA/QC environment, but also increases in R&D funding, particularly through government-funded activities. In the food market, still high growth in Asia, driven by both need to meet regulatory requirements on a global basis. But also, more indigenous type of regulation is being passed in places such as China, India. Major push in China, for example, and we're ready to capitalize on that. The environmental space, again, similar story around quality of life improvements being demanded by population. So good regulatory driven growth across both the food and environmental segment. And then maybe one final comment here. I wanted to comment this earlier. We talked about the quote-to-cash and the $30 million revenue shortfall. I think we also -- keep in mind what we are trying to accomplish on November 1, which really was the combination of the sales force, and we pulled that off and we're seeing the benefits in terms of the top line order growth, I think, we've posted about 16%, about twice of our organic revenue growth rate. Nick?

Yes, just close off. I have the same comments about the global and regional growth. But to some, specifically pharma, we're seeing real strength and have pulled forward. We believe big pharma replacing instrumentation, and we think that will continue now for another two years perhaps. And then we're seeing the geographic displacement of therapeutics. And we're really doing well in the Asia market, as well as other BRIC countries which are coming on. And in the academic government sector, while we had a nice year end bloom, it looks really solid. People's budgets were just locked in. So what happens in our next fiscal year is hard to tell in academic government, but for this fiscal year, the budgets seemed to be rolling globally, and we seem to be enjoying really strong order performance with no downturn in the near-term future.

Your next question comes from the line of Jon Wood from Jefferies. Jon Wood - Jefferies & Company, Inc.: Bill, you closed a little deal a couple of days ago. I think it was in atomic spectroscopy. Was that material? And then in addition to that, can you just give us a view on where the M&A pipeline is as you see it today? I know you're approaching the anniversary of the Varian deal, and would love your updated thoughts on Agilent's enthusiasm in the M&A market.

I think, again, Mike can give some color commentary. The acquisition we made is I think very key for Mike's business in Chemical Analysis. It's not material from the company in the sense that it's going to have a major impact on revenue growth or earnings. We continue to actively look at acquisition opportunities in the marketplace. We continue to be very, very disciplined on looking at these opportunities to ensure that we can return high-quality earnings and return On invested capital to our owners. So again, as you said, we're in a net cash position. The integration is going well. This $30 million glitch in the quarter, I think, is not material whatsoever. So we will continue to look for opportunities. But we will continue to be very, very disciplined in our evaluation of these opportunities.

Bill, if I could just add some comments. It may not be material for overall Agilent, but the acquisition of A2 Technologies is really quite material for our Chemical Analysis Group. This is all part of our strategy to build a leading position in spectroscopy, specifically this company is in the FT-IR business, and the portfolio and technology we're bringing in the company very much compliments that we acquired the Varian acquisitions. So we're very excited about the possibilities there. Jon Wood - Jefferies & Company, Inc.: Mike, if I can just follow up, I think we're talking about Chemical Analysis at 7% organic at the top end of the range last quarter, and now we're talking 9% at the midpoint.

Yes. Jon Wood - Jefferies & Company, Inc.: It seems like a pretty big move. So what's really changed for you? I know you got some tough stimulus comps in the April quarter. Which really changed kind of your view on the end markets for such a big jump in your guidance there?

Sure, Jon. I think I would point to two things, and I kind of alluded to it earlier, which is the bump in the business we're getting through the combined sales forces. So In particular, Asia we're seeing this outstanding growth, have a number of large orders in the first quarter. So very bullish about the opportunities to grow the business, particularly in Asia, with the combined sales force. So I would say the view of the potential top line synergies from the Varian acquisition, as well as I mentioned earlier, there's more money coming into the R&D side of the chemical analysis space. So as we'll share in our analyst presentation, we're about a $10 billion market, but about $3 billion of that is focused on research, if we're seeing good funding it going into those spaces as well.

As mike said, I mean, the orders in Varian in the quarter, the $190 million, I mean, we're really getting some real momentum, as Mike alluded to on the Varian product families. And that's always the big issues on acquisitions is the short-term distractions. We're very, very pleased from my perspective on the progress that's being made in both the CAG sales forces, as well as the LSG sales force. Jon Wood - Jefferies & Company, Inc.: You just said $190 million?

Yes.

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

First question on Varian, I appreciate the color on the revenue recognition that you guys talked about, and if we adjust for that one-time events so to speak and we look at sort of the overall end market dynamics, is it fair to say that you don't see any real market share base factors impacting your business, just given that some of your competitors had pretty good quarterly results?

If you in fact look at our order intake, we feel that we are more than holding our own. From a revenue perspective, we will not compare as favorably, but from an order perspective, we're gathering momentum, and we will quickly catch up.

And then just second item on the funny environment between the academic and pharma end markets you serve. I think you said pharma was up 6%. Just wondering what your outlook is for that end market this year? And then just regarding some of the news release out today on NIH funding, if you have any thoughts on how that market might shape out. I know you mentioned it's uncertain, but how are you guys planning for the long term there?

I'll have Nick respond to your question.

Yes. So first, the pharma market. I'm still pretty positive about it. Remember I characterized all global therapeutics in that swap. So what we're seeing is we're seeing big pharma solid single digits. And so as long as they're mid-single-digit, the rest of the global therapeutic market is really pushing into the double digits. So we think that market is going to be sort of five to seven range, and we think we should be able to take some good above that rate in terms of orders in growth, and so we're pretty optimistic for the rest of the year. On the NIH budget and government budget in general, if you look in the sectors we serve, which are really in the OMEX sectors. NIH has really not been impacted, at least so far. So there's a lot of things moving through Congress, but the sectors we serve, we don't think we're going to see impact negatively. And in fact, the point I was making is we're in the actual middle of a government fiscal cycle, and so unless there's some extraordinary budget cuts done in Washington, we think this year will continue with pretty good momentum in our sector, and globally, that's the story as well. We don't see any cuts coming in the next couple of quarters that will affect our trajectory in academic.

Last one for me will be on the electronic measurement side with the LTE. I think you mentioned new products and there's obviously conference next week. I was just wondering if you look at the kind of demand that you're seeing for your test equipment there, how does this differentiate between the handset providers and the carriers?

Yes. Most of our products are sold directly to the handset providers and the component manufacturers. So whether you look at people that are making components or people that are putting together reference design kits or you're looking at people that actually build the handsets or the base stations, that's where our products gets sold. And the Mobile World Congress started this week and we have a whole series of introductions, including leading not only in LTE but in LTE-Advanced, which is the next generation of LTE. We're already introducing products and tools that are the first in the world for this new LTE-Advanced standard. And again, that's just in the early phases of R&D at this point, but we have broad products across the spectrum.

Your next question comes from the line of Nandita Koshal from Barclays Capital.

Bill, I got a high-level question on Varian. Many of Agilent's life science competitors are now seeing a rebound to 2008 levels in terms of revenue. So how does one think about Varian within that construct without going back to 2008 revenues of $1 billion, $900 million x divestitures and Varian today?

The compare is really in Electronic Measurement business. They're the ones that dropped by $1 billion. And then you have to subtract the NSD, our network divestiture business, and we are faster, if not, approaching the 2008 level. In the Chemical Analysis business, our business only dropped 10% in 2009. And so organically, we are going to easily surpass that. And on the Life Science business, our decline was only in the 1% or 2% range. So our analytical business was not impacted very much during the 2009 downturn, and of course, Electronic Measurement business is coming back dramatically from that downturn just dramatically. In addition to that, and again, to put a plug into Ron and the team, we took the opportunity to do fundamentally reset the operating margin in the business, and that's the reason why Ron's business is exceeding 20% operating margins per quarter.

Bill, I think I was trying to get a reaction specifically on the Varian business. So looking back at Varian in 2008, that was a $1 billion revenue run rate. So assuming about 10% divestitures, how does that piece look today, and what's the plan sort of or what's the expectation around that going back to a $900 million run rate?

Yes, it's a great question, and one that's quite hard for us to answer. Quite honestly, after Q2, you'll never hear Varian again because the year will be up, and everything will be organic growth. The situation we have is first of all, we had to divest 10% of the company based on EU and Federal Trade Commission requirements. So we've got that aside. Secondly, we've gone through a process of rationalizing their product lines, and the ones that were overlapped with Agilent of course, we've already absorbed into the Agilent products. The third part of that is that we have again focused on key platforms and the process of transforming them. So if you look at the overall order rate of $190 million last quarter, we are fast approaching the $800 million. So if you take the $800 million, take out 10% from your reference point and say we basically had to divest that, we still have a little bit ways to go to catch up to the 2008 level with the Varian core products. Quite honestly, what gets lost in the noise is that we're also rationalizing that portfolio, and we will drive the old Varian product lines to our operating model. We will not sustain product lines that we can't get to 20% operating profit. So I would ask that question again at the end of 2011, but I am highly confident that when we are down, we will have a minimum of $800 million to $900 million of revenue that will be at the Agilent operating model.

And I have a very quick one for Nick. We saw pretty robust Agilent presence at sequencing? And I have a very quick one for Nick. We saw pretty robust Agilent presence at AGBT a couple of weeks back. And, Nick, I was wondering if you could give us a little bit of color on Agilent's Genomics piece specifically? Around what plans are to sort of broaden that product line out a little bit beyond just on sequencing?

Yes, sure. we are just delighted with the performance of the products we have, and genome partitioning are excellent sequencing. We see that there is a shift going on. We think that there's a new sector created around next-generation sequencing that is driving this genome partitioning market. We've actually seen several of the big-box players in the space moving to that sector and that's great because it just validates the sector. So we think we have the best product and strongest portfolio. We've already moved to automate. So as you saw on AGBT, we now have full robotics and automation on that partitioning front end, and we're going to continue to expand in that sample prep and automation side of the sequencing platform, and those are some of the things that we discussed at AGBT. And we seem to be capturing mind share as this new market of genome partitioning is expanding rapidly.

Any color on how big that pieces within Agilent's life science?

We haven't said how big the pieces. We think we're one of the largest players in there, and that's moving fast, $100 million as a market fast. So we really not giving you any details on that, and hopefully, we'll be in a position to do so at some point.

Your next question comes from the line of Mark Douglass from Longbow Research.

You mentioned the backlog increased $100 million. Can you break out where the increase was by segment?

Well, most almost all the increase was in the Chemical Analysis and Life Science. Ron's business at EMG had still greater than one book-to-bill.

Do you want me to give you the number? So about $26 million for Electronic Measurement segment, about $40 million for Chemical Analysis and about $40 million for Life Science.

Ron, I want to ask you about the -- but the new line of oscilloscope, and there's been a lot of press on this and it's seems pretty big deal. Can you discuss a little bit about the price points, where you expect it to be as far as the competition, and do think you'll be able to maintain roughly where your gross margins are right now?

Yes. So first of all, we have three different segments in oscilloscope. High-performance realtime scopes, sampling scopes and value scopes. Our high-performance scopes will begin to produce brand-new products last year and our sampling scopes are growing very, very rapidly over at 90% growth. This product is aimed in our high-value oscilloscope line. We will be able to maintain the gross margin. We spent a lot of time developing very cost effective solutions with custom ASICS and custom A-to-D converters in adjuvant labs and the technology center. And it also brings new things to the market they'd never seen. For instance, these is four instruments built in one. A traditional oscilloscope, logic analyzer features, function generator features and protocol analyzer features. And so we believe we'll be able to maintain the margins and take our growth rate from about 80% in this last quarter in the high-volume segment to a point where we'll be able to continue that growth as we go further and continue to take market share.

And you don't see this cannibalizing sampling scopes, just from the higher-end scopes at all? Is there enough differentiation between all of them?

Yes, they are a completely different moments level and price levels. They don't overlap at all compared to those other two segments.

Historically, this has been a segment of the market where we have not spent a lot of attention. Again, this is for decades, and decades where we have focused on the high end as Ron talked, as well as the sampling scope. And so this 26 families goes right at the heart of the segment of the market that we had historically ignored. And so we're very, very excited.

This is a product segment where Tektronix has been there. This product start at about $1,200 and go up from there, but they're very, very cost competitive and we look forward to the results.

And then finally, just thinking about order rates. The book-to-bills, all of them, but sequentially orders ticked down a little bit. Is that kind of normal seasonality, anything to read into that or what?

Personally, from my perspective, Q4, the end of our fiscal year is always the highest order rate in the year, and needless to say tied to and if your commissions. I was very pleased on the Q1 order rate, and essentially, only being down a few percent from our Q4 rate. So my personal interpretation is good news.

Your next question comes from the line of Richard Eastman from Robert W. Baird. Richard Eastman - Robert W. Baird & Co. Incorporated: Ron, could you just talk to for a second the core LC growth rate in EM was bumped up to this 14% number. Is the biggest factor there, maybe rank the factors there in acceleration in the comm [communications] spend, or is it the better performance and outlook for the GP side of the business?

The Comm segment is the strongest for -- the Comm segment for instance last quarter grew 45% and the GP business grew 24%. So there's no doubt that not only in the last quarter what we're seeing with our position in LTE taking business in research and development for handsets, and taking business in production or manufacturing for base stations, we're having some tremendous success in those areas. But we are seeing a broad rebound compared to what was a very low 2009 level in the recession, and we see saw strengthening last year of roughly around 30% order growth. And this year, we're seeing that continue. The compares will get tougher. But as Bill has mentioned, we have done great work on our business model, set up the right structure and leaned our product line. So that's why we're producing 20% operating margin and 34% ROIC in Q1, and why we're at a completely different level of contribution than we were a year or two ago. Richard Eastman - Robert W. Baird & Co. Incorporated: You picked up some margin, I guess, incremental margin, contribution margin from the comm growth rate, I would assume. But again, it wasn't that long ago, perhaps a quarter or two, where people were very spooked about the GP side of the business and presumably, you're feeling much better with the 20% growth rate than the prospect at that time was potentially flattening out. So I mean just when you're looking at the delta to your last forecast and this one is probably easier to understand the comm acceleration, but it sounds like you're much more confident in the GP side of the business.

Well, there's three different pieces in GP. We have the general industrial market, we have computers and semiconductor and aerospace/defense. The computer and semiconductor markets are growing rapidly. Now, obviously, the growth rates in semiconductor have come down, but they're still very hot for us right now and still over 50%. The computer business, we've talked about that, which is driven by our Oscilloscope business, seeing very strong growth. The only area that we're very cautious about is the aerospace/defense area due to the government's spending policies with this continuing resolution that's going on. But overall, we feel very comfortable with the guidance that we forecasted. Richard Eastman - Robert W. Baird & Co. Incorporated: And just maybe for, Didier, just a quick question on the gross margin impact of Varian. Can you just give us some sense of what that was in the LSG group and the CAG group? It's probably difficult to do, but if you're just looking at gross margins, I think LSG was down 100 bps year-over-year and the CAG was down 400 bps. How much of that might be thought of as Varian?

The one thing I can say is the bio-analytical measurement businesses, where their year-over-year incremental on an organic basis was totally in line with the 30% to 40% incremental. So Varian did have an impact under -- like when Varian revenue was $170 million, we had an operating margin for Varian of about 6%. So you can imagine of the $135 million, you're much closer to the break even point that had an impact obviously LS and CA. But without Varian, the year-over-year operating margin would have been totally in line with their commitment. Richard Eastman - Robert W. Baird & Co. Incorporated: I may have just heard this incorrectly, but Nick, in your group, is the core growth rate -- did you say plus 10%?

What Didier gave you was the midpoint of our range. To achieve the midpoint of Agilent, LSG could achieve 10%, albeit the midpoint of the Agilent range. That's what he gave you. Richard Eastman - Robert W. Baird & Co. Incorporated: Previous to this, were we thinking plus 12% to 14%?

In the previous call, what Didier said was at the high end of this guidance, LSG would be 12%. I think we're not moving those numbers around on you.

Your next question comes from the line of Anthony Luscri from JPMorgan. Anthony Luscri - JP Morgan Chase & Co: I wanted to dig in a little bit more on the Electronic Measurement, specifically to -- it seem to be bouncing up against the prior guidelines that you give us after your restructuring for operating income and ROIC that you're well away from the peak revenue. How should we view the operating margin profile of EM looking ahead into fiscal '11?

I'll have Ron make some comments about where it is. The big issue that we have, we actually as a company as to continue to expand our manufacturing capacity, lead times for Ron are the longest in the company. One should look at it that the investments that were made in place is that Agilent will have an online capacity in Q1 of 2012 of $7 billion. And that is the big challenge is to get -- continue to get our capacity up so that we can in fact drive forward. As Didier said, we are absolutely committed to continue to drive our incremental, and Ron has the highest hurdle. So I will have him talk about his hurdle rate, and therefore, the corresponding margin he will drive as he increases his capacity.

Yes, we've committed to deliver 40% incremental on the incremental revenue, and we've been delivering in excess of that as you've probably seen and noticed. For instance, this last quarter, incremental was 55%. Now at some point, that gets back down. But we are committed to delivering the 40% incremental, and we delivered 18% operating margin in Q3, 20% in Q4, 20% in Q1. And as we go forward, we think we're very comfortable with our 20% operating margin with the 40% incremental. Anthony Luscri - JP Morgan Chase & Co: And then digging in a little bit better deeper on the oscilloscope growth that you've seen in revenues and orders, I just wanted to hear, from a secular level is driving that growth? Because your competitors are entering the market, others are also in product cycles. What were the key drivers there?

One key driver, clearly, from a customer demand standpoint, this new bus standards, the new serial bus standards that are being used inside the computer and to actually go ahead and move outside the computer are things that need to be tested and are being tested with our oscilloscopes. On top of that, last year, we introduced the world's highest performance, realtime analog bandwidth oscilloscopes with our G-Rex family of products. And although there have been some announcements that have been made since then, we still have the absolute highest signal integrity or the highest quality products on the market. And that's why the demand is far greater than the supply we can produce at this point. So we're seeing explosive growth due to the take-up of our brand-new products, especially at the high end. And now, as we look at the lower end range, and introducing those 26 new models today in Asia and tomorrow in the Americas and Europe, you will see I think the low end continue to accelerate, and that's why I believe we will continue to take market share from the competition. And our market share we believe right now is the highest level it's ever been in the company for oscilloscopes. Anthony Luscri - JP Morgan Chase & Co: And then last question is around backlog again. What is the age of the backlog, and what has been the trend of that age for the last couple of quarters?

We have very strict booking rules. We don't book anything over six months outside of long-term service orders. And so again, very, very strict and that's why it's so imperative for us to continue to drive our revenue upward, and that's why we have readjust our guidance for the year.

The only exception to the rule is regarding the research products in the NMR where there are longer lead times between order to shipments, and that's a new business for us. But all the way, the rule is three to six months maximum, so the backlog covers six months of shipments.

Your next question comes from the line of Ajit Pai from Stifel Nicolaus. Ajit Pai - Stifel, Nicolaus & Co., Inc.: A couple of quick questions on the electronic measurements side. One of them is the last cycle especially the late '90s, 2000, you had extremely solid position in optical. Could you give us some color as to that side of the business, if it's material first of all as part of your business right now, and what kind of trends that you're seeing over there?

Sure. The optical part of our business is a much, much smaller part of our overall business than it was back at that period of time. It is doing - we are seeing very nice growth. The sampling scope subsegment, which is achieving over 90% growth rate now is seeing some rebound. But again, it's a small portion of the overall total of the Agilent business. That, and a couple of product other product categories. So we are experiencing some benefit from it, but it's not a large portion of our results. Ajit Pai - Stifel, Nicolaus & Co., Inc.: And then the second is looking at the ROIC of your overall Electronic Measurement business, it's extremely impressive and very high. But for a couple of quarters, it's now been the highest of any of your businesses. So do you believe that this is a business that you don't want to be investing in, in the longer run? And how would he prioritize your investments in this area and also future M&A, whether you're still open to consolidating your position here?

First of all, you'd be very careful being the 70-year-old business, the amount of capital or capital structure that we have in place for EMG is quite a bit lower than all on the LSCA side relationship to revenue and all of the goodwill that we have through the acquisition of Varian. So again, it's not an apples-to-oranges comparison. The investments they were making in EMG and R&D is consistent with any of our top competitors that we have, and we are, as you can see, investing to win. Ron, I'll have him again comment, we've talked about our oscilloscopes, we talked about LTE, but I'm going to have a moment what we're doing in network analyzers and in spectrum analyzers, but we are a leader in electronic measurement in every single one of our product portfolios and across the industry and absolute performance. So, Ron, why don't you make a couple of comments about the network analyzers, and spectrum analyzers?

Sure. As Bill mentioned, we spent more dollars than anybody else in R&D, and we spend at the same relative rate relative to revenue as most of our competitors. But the our growth is not only driven by a product category or two. We have introduced the world's highest performance network analyzer products during the last years, the world's highest performance spectrum analyzer product, and we have the worlds largest signal sources. So when you look at our core products and the core products, we grew 37% last quarter for all of them. And it makes up about 40% of EMG. So there's very, very strong success across the product line, and that's why we can produce gross margins like this and operating margin of 20% in this area. But we are investing, and investing to win, as Bill said, in all of these main product category areas.

In terms of the acquisition area, we've been very, very clear. Our number one focus is in Life Science Analytical business. If there's an opportunity in Ron's space, Electronic Measurement, that we can make, that we can clear the regulatory environment, we would seriously consider that. But we have not deviated from our overall strategy to continue to invest in the analytical space led by Life Science. Ajit Pai - Stifel, Nicolaus & Co., Inc.: And then the second question would be just looking at the strength that you've seen in the oscilloscope market, as well as some of the other businesses on the electronic measurements side. How sustainable do you think it is? When you look at the funnel, not just near term for these new products it just seem tremendous growth, but 70% to 90% order growth, 70% revenue growth for the overall oscilloscope category appears significantly higher than the long-term growth rate that this industry has had.

As Didier said in his prepared comments that we come out with some tough compares, and that we're looking at EMG for 2011 on a 12% organic growth rate as it turns out to what the market growth rate is going to be. And I think during the March analyst call, we'll have a lot of discussion about that. We have a big debate about how strong the overall macroeconomy is going to be. I think 2011 will continue to be strong, and that will carry over into 2012, is my own personal opinion. But the organic growth rates, fundamentally, are going to have to come back to some percentage points away from the overall market growth. The message I think Ron has articulated very, very well that we are in a very, very strong competitive position. Ajit Pai - Stifel, Nicolaus & Co., Inc.: And on a sequential basis, you're not seeing any signs that the business is going to be slowing anytime soon?

No.

Your next question comes from the line of Steven Unger from Lazard Capital Markets.

Just a quick question on business -- just necessarily talk about much in your prepared remarks. As far as service sales are concerned, could you talk about how strong they were as far as revenues in the quarter? And should we expect further acceleration in the service growth rate with the pull-through from strong orders that you've had over the last year?

Absolutely. And again, you got to be careful. I'm talking about service and support different than our consumer business. As our revenue business grows, our ability to sell extended warranties -- there's a warranty period, right, for the year. But one would expect the service and support business to continue to grow. It's really quite a large part of our business overall. The teams in each of the groups have done a superb job of improving our performance. We are highly competitive, have great customer satisfaction scores, which you're absolutely right, our service and support will trend upward with the increased sale of our instruments.

So then as far as the rest of the year is concerned, we should expect accelerating revenue growth there given that we've had accelerating growth in product sales in 12 months?

Yes, but it won't be at the rate of the instrument box, because essentially depending on what the warranties going to be, you get that, you might get some extended warranty upfront, which will have an impact. But the delay, that's a little bit longer than 1:1 of what the order growth are coming in.

And then, Didier, did you mention that the expected tax rate will be for fiscal 11? Was there an update on that?

Yes, so 18% for fiscal year '11. Last time, we talked about 19%, and we came down 1% mostly on account of the extension of the R&D tax credit in the U.S.

And then were you expecting that in fiscal 2012, the reduction?

2012, we will have potentially two factors to take into account: Number one is one percentage point reduction on account of the Varian integration being completed, and our ability to bring Varian tax rate down to the Agilent level. On the other hand, we cannot predict if the R&D tax credit will be extended another year. So if it is extended, then we'll come down from 18% to 17%. If it does not extend, we'll stay at 18%.

Your next question comes from the line of Jonathan Palmer from CLSA.

If you could just break out for us, if you backed out in the quarter the Varian $30 million, what would Asia have grown on a constant-currency basis?

All of Asia organic revenue growth was 21% for the company. So that's without any of Varian. It was 30% with Varian in Asia.

And then the split of that $30 million in orders that didn't go through, was it U.S. or should we think about it split geographically similar to Agilent?

First, I don't know the answer. Your can send an e-mail to Alicia, she can figure that out. But first, I would just split it by our existing mix.

Just one quick question for Didier, housekeeping here. In terms of the interest rate, what should we think about for the full year interest expense?

So interest expense, I think, I would assume $17 million per quarter of interest expense, net interest expense, offset by $3 million of rental income. So net-net, other income and expense of $14 million negative.

At this time, I'm showing no further questions in queue. I'd like to turn the call back over to Ms. Alicia Rodriguez for any closing remarks.

Thank you, Derek. On behalf of the Agilent management team and executive team, I'd like to thank everybody for joining us today. If you have any questions, please give us a call at Investor Relations, and have a good day. Thank you.

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