Agilent Technologies, Inc. (A) Q2 2012 Earnings Report, Transcript and Summary

Alicia Rodriguez William P. Sullivan - Chief Executive Officer, President, Executive Director and Member of Executive Committee Didier Hirsch - Chief Financial Officer and Senior Vice President Nicolas H. Roelofs - Senior Vice President and President of Life Sciences Group Guy Sene - Senior Vice President and President Electronic Measurement Group Michael R. McMullen - Senior Vice President and President of Chemical Analysis Group Ronald S. Nersesian - Chief Operating Officer and Executive Vice President

Jonathan P. Groberg - Macquarie Research Nandita Koshal - Barclays Capital, Research Division Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division Daniel Brennan - Morgan Stanley, Research Division Doug Schenkel - Cowen and Company, LLC, Research Division Jon Davis Wood - Jefferies & Company, Inc., Research Division Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division Derik De Bruin - BofA Merrill Lynch, Research Division Tycho W. Peterson - JP Morgan Chase & Co, Research Division Isaac Ro - Goldman Sachs Group Inc., Research Division Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Agilent Technologies Earnings Conference Call. My name is Keith, and I'll be your operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. And I would now like to turn the conference over to your host for today, Ms. Alicia Rodriguez, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, Keith, and welcome, everyone, to Agilent's Second Quarter Conference Call for Fiscal Year 2012. With me are Agilent's President and CEO, Bill Sullivan, as well as Senior Vice President and CFO, Didier Hirsch. Joining in the Q&A after Didier's comments will be Agilent's Chief Operating Officer, Ron Nersesian, and the Presidents of our Electronic Measurement, Life Sciences and Chemical Analysis Groups, Guy Sene, Nick Roelofs and Mike McMullen. 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, where you will find revenue breakouts and historical financials for Agilent's operation. We will also post a copy of the prepared remarks following this call. For any non-GAAP financial measures, you'll find the most directly comparable GAAP financial metrics and reconciliations on our website. We will make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risk and other factors. And now, I'd like to turn the call over to Bill.

Thanks, Alicia, and hello, everyone. Agilent's Q2 orders were up 8%, and Q2 revenues were up 3% over last year. Non-GAAP EPS was $0.78 per share, and operating margin was 19.5%. Our Q2 performance demonstrated our ability to deliver strong results in spite of a challenging economic climate. Here are some of the business highlights. Electronics Measurement revenues were up 5% over last year. EMG's top line strengthened, with a book-to-bill of 1.09. Both orders and revenues were the highest since 2001. Operating margin was 23%. Communications market revenues grew 7% year-over-year, with strong demand for wireless manufacturing test. General-purpose, which includes industrial, computer and semiconductor markets, was up 5% with solid macroeconomic trends in Asia, the Americas and higher contract manufacturing demand. Aerospace and Defense grew 1%, reflecting higher U.S. government demand, partially offset by lower defense contractor business. Last quarter, we introduced the Infiniium Q Series oscilloscopes, with industry-leading real-time bandwidth of 63 gigahertz on 2 channels and 33 gigahertz on 4 channels. These new scopes deliver superior measurement accuracy with the lowest noise and jitter measurement floor in the industry. We also introduced 4 new X-Series signal generators, which provide industry-leading performance at the lowest cost of ownership. Applications include radar, military communications and consumer wireless. In our Bio-Analytical Measurement businesses, you'll recall that a year ago, we experienced some revenue delays from the Varian integration. This resulted in an easier compare last quarter but tougher compares for our second quarter of fiscal 2012. Adjusting for the effect of last year's integration issue, our Analytical business grew 5% versus the reported 2%. My comments will reference the reported revenue. Chemical Analysis revenues were up 2% year-over-year. Operating margin for the quarter was 19%. Food and Petrochemical remained solid, both up 2%, driven by global demand. Environmental and Forensics were up 1%, with strong demand in emerging markets offset by soft government spending in the United States and Europe. Our recently introduced GC/MS Q-TOF continues to gain traction with higher incoming order rates, and we're starting to see a tick-up in orders for the new ICP Triple Quad. We also entered into a cooperative research and development agreement with the U.S. Food and Drug Administration to develop new tools to detect and analyze pathogens in food. Life Science revenues were up 1% over a year ago. Operating margin was 13%. Our pharmaceutical business paced ahead of the market with 4% growth as we continue to see good market penetration acceptance. Academic and Government were down 6% over a year ago, reflecting the softness in government spending. We introduced Agilent's SureFISH probes, the next-generation fluorescent in-situ hybridization assays. SureFISH delivers a comprehensive menu of over 400 probes with the industry's leading resolution for a wide range of molecular analysis applications, including cancer research. We also announced a number of extensions to the 1200 Infinity LC product line, setting new benchmarks in performance, versatility and cost of ownership. Agilent also paid its first quarterly cash dividend at the end of April. The initiation of a quarterly dividend reflects Agilent's financial strength and continued growth opportunities and underscores our commitment to enhance shareholder value and return. Agilent enters the second half of fiscal year well positioned to navigate continued economic uncertainty. Our backlog has grown by over $100 million. We continue to deliver industry-leading products to the marketplace, and our expenses continue to be well controlled. The key to Agilent's continued success is our ability to react quickly to business opportunities anywhere in the world. Thank you for being on the call, and now I'll turn it over to Didier.

Thank you, Bill, and hello, everyone. As always, my comments will refer to non-GAAP figures. Agilent second quarter results again reflected the soundness of our operating model. Revenue was adjusted for the change in exchange rates since last quarter were $14 million above the high end of our guidance, while EPS of $0.78 per share exceeded the high end of the range by $0.05, benefiting from the revenue strength, well-managed operating expenses and a non-GAAP tax rate reduction to 16%, which contributed $0.015. Now starting with Q2 orders and revenues. Orders of $1.84 billion were up 8% from one year ago and up 9% in constant currency. Segment orders adjusted for currency reflected a 13% increase in EMG, CAG grew 8% and LSG was flat year-on-year. Regional order growth rates in constant currency were 22% growth in the Americas, a 2% decline in Europe, 5% growth in Japan and a 3% growth in the rest of Asia-Pacific. Revenues of $1.73 billion increased 3% from one year ago, 4% at constant exchange rates. CAG and LSG revenues grew 3% and 2%, respectively, at constant currency. Adjusted for last year's Varian revenue delay impact to Q2 fiscal '11, CAG grew 7% and LSG grew 3%. EMG revenues grew 5% on a currency-adjusted basis. Regional revenue growth rates in constant currency were 16% growth in the Americas, 5% decline in Europe, 2% decline in Japan and 1% decline in the rest of Asia-Pacific. Now moving to the income statement. As I've noted in the past, while currency does have -- does impact each P&L line, it has minimal impact on our operating margin performance as a result of our geographic diversification and systematic hedging program. Gross margin of 54.1% was down 130 basis points versus last year due to EMG's 250-basis-points reduction resulting from a higher percentage of wireless manufacturing test business. Operating expenses continued to be well controlled, declining 1% year-over-year. Consequently, our Q2 operating margin of 19.5% was up 20 basis points versus the same period last year. Non-GAAP net income of $275 million or $0.78 per share compares to $261 million and $0.74 per share one year ago, an EPS increase of approximately 5% year-over-year. Turning to the cash flow. The quarterly cash generated from operations were $353 million, down $25 million compared to the same period last year. During the quarter, we paid our first dividend in the amount of $35 million. Our cash position at the end of April was $3.9 billion, mostly offshore. Now turning to the guidance of fiscal year 2012. As always, our guidance assumes exchange rates as of the last day of the reported quarter. We are projecting a fiscal year '12 revenue range of $6.94 billion to $7 billion, same $6.97 billion midpoint as in last quarter's guidance. At the midpoint, our guidance corresponds to a core growth of 6.7% in the second half, and for the full year, a core growth of 5.7%. The second half core revenue growth is projected to be close to 5% for EMG and close to 9% for CAG and LSG combined as we move into easier compare territory. Our fiscal '12 EPS guidance is $3.18 to $3.24. We are increasing the midpoint of our prior fiscal year guidance by $0.03, entirely due to the reduction in our non-GAAP tax rate to 16%. The midpoint of our EPS guidance at $3.21 reflects 9% growth over our fiscal year '11 EPS of $2.95, which is consistent with the year-over-year operating margin incremental of 33%. Finally, moving to the guidance for our third quarter. We expect Q3 revenues of $1.77 billion to $1.79 billion and EPS of $0.82 to $0.84. The core revenue growth at the midpoint will be 6.8%, while the midpoint of our EPS guidance will represent an 8% year-over-year increase. With that, I'll turn it over to Alicia for the Q&A session.

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

[Operator Instructions] And your first question is from the line of Jon Groberg with Macquarie Capital.

So just 2 for me. If you think about the revenue guidance, just maybe to get a little bit more clarity there, because I think you actually came in at the high end of the guidance. Sounds like your book-to-bill is pretty good. You feel better about the comps. But your revenue guidance overall, if you take the midpoint, as you said, maybe it didn't really move that much. So maybe you can just talk about what you're seeing from an end market perspective and kind of what's built into that outlook?

As you already said, Jon, we do enter Q3 with a very strong backlog, and we have the easier compares, as Didier said, in Q3 and Q4. Right now, our sales funnels look good. In a capital equipment market, these can also turn down quite rapidly if, in fact, there continues to be economic uncertainty. But as we enter into Q3, the sales funnel around the world looks good. And so that's why at this point in time we have confidence in our revenue guidance.

Okay. So just conservatism given everything that you see in the world as opposed to anything right now that's going on with the business.

Well, I think in terms of the business, we have 2 areas that we highlighted. Europe is struggling, particularly on the Electronic Measurement side, and Academic and Research on the Life Science side were down. That was more than offset by the wireless manufacturing. That one, of course, will continue to be the most volatile in that. But right now, we continue to play a strong hand on the wireless manufacturing. And again, on adjusted revenue going forward, the rest of our core businesses, in terms of Pharma, Food, Petrochemical and General Purpose, Test & Measurement, look reasonably strong.

Okay. And then if I could just follow up on the Life Science that you alluded to, I know you said Government-Academic was weak. You just highlighted Pharma was fairly stable, it sounds like. But the one thing in that business, if you look at the margins, kind of the incremental margins, it looked like things improved a little bit in the first quarter of '12 relative to the trend. It kind of took a step back a little bit again in the second quarter. Can you just kind of talk about -- I think you said comps got easier, so I don't know if that's -- if you're thinking more about the Pharma side versus the Government and Academic, maybe how that plays out and what to expect from the margin side of that business, the incremental margins on the Life Science side.

Yes. Jon, I'm going to have Nick respond to your question regarding the outlook and the margins.

Yes. So Jon, I'll kind of walk you through from the top. It -- we had softness in the orders in Academic as we pointed to. Frankly, that order softness was sitting heavily in the Research Products division and also in the genomics division. Genomics looks like a pause. Research Products is -- we're now on the back end of the stimulus money. So it's -- we had a tough compare last year. Those orders in Research Products that we took last year are now shipping. And frankly, the operating margin on some of those orders weren't as good as we had hoped. As you know, that business is in a repair mode, so that's where the gross margin movement is. It's a mix equation for the quarter.

But we do forecast in our guidance an improvement in operating margins as per overall commitment for the year with a sound incremental for the whole year.

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

I guess, Didier, just to continue with that part on the gross margin side, could you talk about just across the 3 divisions? I see EMG, despite the revenue upside, came in a little bit softer as well. So what sort of P&L mix are you thinking about going forward in terms of SG&A margins, gross margins? You did a little bit better on the SG&A side. Could you elaborate on that a little bit?

Yes. EMG had a very sound incremental this quarter of 34% and with a pretty high, I would say, ROIC of 48%, so we are very pleased with EMG's results. This being said, there is, as we have always said, gross margins are higher in R&D test than they are in manufacturing test in the Communications space. And there was a pretty significant content of the manufacturing wireless, manufacturing test business this quarter, which we think will be sustainable for the next quarter. But -- so we are -- again, for the whole year, EMG's operating margin incrementals are very, very much in line with our model.

And so the gross margin was really just a mix effect, and you expect that to swing back to the normal level?

The gross margin -- exactly, it's a -- there is the mix impact, which will stay with us at least for the next quarter, and potentially it gets a little bit better in Q4.

Did the overall incremental guidance for the full year soften a little bit from sort of the 35% to 33%, or did I get that -- did I mishear that?

Well, there is always a little bit of a noise here. There's, for example, if there is a slight currency changes that impact the top line but don't impact the bottom line, therefore, they change the incremental, so it's a little bit kind of mechanical things. But overall, we are very much in line with our commitment. At this kind of revenue growth, in fact, we are better than our commitment in terms of growing margin, thanks in big part to our strict control of operating expenses.

I see. Okay, and then just to wrap up. I wanted to ask Bill about the quality of visibility in the business just broadly. But in EMG specifically, Bill, you'd said the signal-to-noise was rather weak last quarter. Maybe if you could update us on some of those pieces that you called out as being weak in Q1, the base stations, RF components, some of the supply chain color.

Yes, I'll just make a few comments and then turn it over to Guy. But as we said last quarter, there was a lot of softness in the base station purchasing as well as the RF components. And again, high-level has not done a lot better. Wireless manufacturing tests for cell phones has gotten a lot better. But Guy can give more details.

Yes, Bill, I would just confirm what you said when we've seen clearly uptick in wireless manufacturing test. But what we had said in Q1 is the overall business for base station and the added component manufacturers that supply the base station business have not changed. And we'd probably look -- we'll see this over the next couple of quarters as being the case. And the other businesses saw -- clearly, we've had a very balanced, in fact, result across the different market segments as we see both aerospace, defense stronger than what we are -- expected and our overall ICS segment also growing 5%. So we have a very stable and balanced outlook for EMG.

Your next question is from the line of Paul Knight with CLSA. Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division: You had an extraordinary top-end line growth on the North American business at 16%, Asia down negative 1%. Can you talk to that spread?

I'm going to have Didier answer that question on how we report revenue by continent versus country.

Yes. So the way we report orders for, let's start with orders, is we report orders in the regions were orders are placed. So if an order is placed in the Americas, we report these orders as being in the Americas. And basically that's where the decision-maker is and usually where our field engineers are located also. And in order to be consistent on a regional basis, we report revenue exactly the same way as we report orders. So basically, in the regions where the order is placed is the same because we want you guys are going to start looking at orders and revenues, so we want to be consistent. Now to give you additional information, we track also revenues on a ship-to basis, so where we deliver the instrument or the service. And you can have, as you can imagine, with so much manufacturing taking place in Asia, in China, a big discrepancy between where the order is placed and, therefore, where we report revenue on the original basis and where we report revenue on the ship-to basis. So we often provide information as to our country growth rates, and this is always on the ship-to basis.

So to give you -- and this quarter is obviously a more of anomaly. Overall, our reported Asia business is flat. China's revenue, ship-to revenue that was delivered in China is up 12%.

Your next question is from the line of Dan Breandan with Morgan Stanley.

I thought maybe we could just dig in a little bit on -- just on the Communications business. Where you -- can you just give us a little bit more color about where the strength is coming from today? I mean, are we seeing much on the 4G side yet, Bill? Maybe help us think about the design side and kind of the production side. Is that business still mostly on the come in '13? And maybe just flesh out some details there.

Again, we've been very clear on our position that the growth in cell phones, smart cell phones, is continuing to be dominated by G3, and that's where most of our growth is. You are starting to see the LTE G4 rollout in the United States. But again, correct me if I'm wrong, Guy, most of the growth is still all 3G-based.

That's correct, Bill. I would say that more and more of our customers look for 4G-enabled products. So as we go, it's going to be more and more difficult to make a difference between 3G and 4G. And so going forward, people really invest into products that are capable of doing all of that right [ph].

Great. And then maybe just one quick follow-up just on Chemical Analysis. I know you gave some color about the trends that you were seeing in the quarter. How do those trends compare to your own internal plans? Could you just remind us? Because it looked like this Chemical Analysis business was a little bit weak versus our model. I'm just trying to think about how it did versus your expectations and what we should expect.

Yes, as we had noted, the actual growth in Chemical Analysis is roughly 7%. But I'll let Mike give some color commentary. And again, I can't stress our Q1 growth rates in our analytical business in Q1 were overstated by a lot and -- because of the anomaly of the Varian integration, and, again, we're obviously seeing that in the Q2 results.

Thanks, Bill. Maybe a few additional comments on the Chemical Analysis business. As Bill noted, revenue was up 7% on this adjusted basis. But we have -- as you dig in to the Q2 results, you really have a lot of reason to be confident about our outlook for the second half. 8% constant currency order growth rate, as Didier mentioned; book-to-bill over 1%; the emerging markets, strong double-digit growth in the quarter, and in fact, I just got back from a week in China, and the business is still a very solid there with solid growth; and our new products are ramping well. So it's tracking very nicely relative to our expectations, and we have a really positive outlook for the second half.

Your next question is from the line of Doug Schenkel with Cowen and Company.

EMG in Americas drove a decent portion of the revenue upside in the quarter. And I think this is pretty consistent with some of the recent signs in LTE and 4G. But I guess what I'm interested in, was Americas EMG a bit better than internal expectations for the quarter? And then I guess on the other side of the world, how did EMG perform in Asia relative to your internal expectations? I think some may have thought that would have rebounded a bit more strongly, given the timing of lunar new year?

I think if you look at EMG in its totality and go into the reasons that Didier talked about how we report orders and how we report revenue that the quarter met expectations with slight upside due to manufacturing cell phone test. And I think you really have to look at it holistically and not just isolate one region versus the other.

Okay. And then I guess for both of you, Bill and Didier, operating margin was certainly a bit better than consensus expectations, and this is in spite of gross margin coming up a bit light, largely because of the EMG product mix. Logically, one might be able to conclude that you're accelerating cost savings initiatives in the face of economic uncertainty. Is this a fair conclusion?

I'm going to have -- and again, Didier may comment, but I'll have Ron talk about what we're doing in terms of our cost savings moving forward. Obviously, as Didier said that in manufacturing test for cell phones, the margins tend to be lighter. Ron has a detailed program to be able to drive our gross margins up. And as you can see, we are controlling hiring, controlling expenses and ensuring that we're only making the appropriate investment where we think there's business opportunity given the economic uncertainty. But, Ron, maybe make a few comments on our continued progress on improving gross margins?

We're on track for making the improvements that we need to make in LSG and CAG in gross margins. We're focusing on 3 particular areas with our new organization: one is on procurement, making sure that we use the levers of approximately a $7 billion corporation; the second is on logistics, making sure that we use logistics contracts that also gets this type of leverage of being a large organization as we move products and solutions around the world; and the third is leveraging instrument manufacturing. But all these things are in place, they're on track. Some things that are contracts -- the old contracts do not run out for a while, so you'll see that continue to add value to the company along the line of the guidance that we gave last time. And other things that are redesigns will take more time. But we are seeing improvements right on top of and on track of what we had talked about last time.

Okay. And if I could ask one more, and it's a high-level one but, I think, an important one. Your stock has appreciated, I think it's about 11% year-to-date. You've outperformed the S&P, but there's been clearly a pullback since the beginning of calendar Q2 relative to the market, and shares are still materially below where they were a year ago. Many investors with whom I speak love the Agilent story. They love the cash flow. They think highly of your discipline, and they view the valuation as attractive. At the same time, they're growing a bit frustrated with the stock performance and wonder what else can be done to get the stock to work a bit better. How much do you pay attention to stock performance over the past several quarters? And I think, getting to kind of the crux of this, are you giving any thoughts of being even more aggressive with M&A or trying to find new vehicles to bring cash back to the U.S. in a way that potentially could benefit shareholders?

Yes. Again, we have the same frustration as our investors do. My job reporting to the Board of Directors is to improve the value of Agilent's stock going forward. And a large part of my pay and this executive team's pay is tied to our total shareholder return versus the segments of the S&P 500 that we compete into. I think you alluded to the problem. I've been quite hopeful that there would be common sense and that one would be able to tax-effectively bring back in cash back into the United States tax-effectively. It appears that is not going to happen anytime soon. And essentially, Agilent has $3.9 billion sitting overseas. Our #1 priority continues to look for acquisitions, particularly on the analytical, life science renew and anything that we can do to increase the percentage of reoccurring business. We continue to look for opportunities to be able to deploy that in an acquisition that we have high confidence that we can return long-term value to our shareholders. We continue to, again, lobby and hope, along with the rest of the companies in Silicon Valley, that Congress sees the benefit of bringing in this overseas cash tax-effectively and reinvesting it back in the United States. But again, we share your frustration.

But in the absence of any miraculous change in Washington, the plan is to stick with the same discipline when it comes to what you do and the lack of repatriation, meaning no debt to fund buybacks, and you stick with the same M&A discipline?

We'll continue to stick with the M&A discipline moving forward. Obviously, our bias is going to be more outside the U.S. than the inside. We are absolutely committed to our investor-grade rating. And I think at this period of time, given the economic uncertainty, to load up the company in debt for a short-term recapitalization isn't a prudent strategy.

Your next question is from the line of Jon Wood with Jefferies. Jon Davis Wood - Jefferies & Company, Inc., Research Division: So, Bill, why would EMG only grow 5% in the second half of the year given the orders -- I mean I think that the 960 in orders is the highest ever after restructuring some of those businesses. So did you see a onetime effect in the quarter? Or are you just being conservative on the macro? Because it seems like on the order trajectory, EMG should be much higher than 5% for the back half of the year. So I'd love some color on that.

Yes. Again, there is an enormous amount of economic uncertainty out there moving forward. Q1, we were surprised to the negative; Q2, we're a little bit surprised to the positive. And so I think that we're taking a very prudent position. And you've, I'm sure, read all the commentary of our competitors in this space. And I think that we have a prudent plan and, as a result of that, realistic guidance for the second half of the year. Jon Davis Wood - Jefferies & Company, Inc., Research Division: Understood. Can you just talk through the linearity in EMG for the quarter? So meaning February, March, April, was there any trend put in, in terms of strengthening, decelerating? Or was it very sporadic?

No, the quarter was, I think it was pretty solid across the board. Jon Davis Wood - Jefferies & Company, Inc., Research Division: How was April in EMG?

The quarter -- EMG's quarter was quite solid across the whole period of time. Jon Davis Wood - Jefferies & Company, Inc., Research Division: Okay. And then just -- the last one is for Nick. I think you've had some dislocation in your OEM business. Can you quantify that in the quarter? And you were talking about Research Products, Nick. And I'm not sure, is that NMR? Can you give us some more color about the weakness you saw in your business, so the specific product line there?

Yes. So the dislocation in the OEM I think you're referring to is the LC business. And we said publicly that's in the percent range. And obviously, that's out of our baseline going forward. We did have a negative revenue growth in LC, but just barely, for the quarter. And Research Products, I really was pointing to NMR when I made that comment earlier. Jon Davis Wood - Jefferies & Company, Inc., Research Division: Are you willing to go into a little bit more detail on where that business is in terms of new product vitality? Is it -- have we troughed there? Can you just give us some level of conviction that the appropriate actions have been taken there and kind of how you see that playing out the next several quarters?

Yes, John, we continue to slog through a forward pace in terms of coming out with new products and fixing cost of goods and doing elements under the covers. We are making progress in that slog. But as I said before in March, and I'll continue to say this year, the results of that progress really don't show up in the next couple of quarters. We continue to slog through, ship product, we'll have some mix issues, like we did this quarter, in terms of aggregate gross margin for the whole business, because that business is at lower margin. And we're pretty optimistic that there is progress.

Your next question is from the line of Patrick Newton with Stifel, Nicolaus. Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division: I guess first off for Didier, I wanted to focus on gross margin. And I guess, given the increased demand for wireless test and the expectation of continued strength, is it fair to say that we should kind of see a depressed gross margin here over the intermediate term? And then what is it going to take to get us back to kind of 55% to 57% range longer term?

So I mean, we do see, based on our guidance, some improvements from the 54.1% gross margin that -- in Q2 going forward. Obviously, a little bit of revenue growth will help. And as I mentioned, we probably will see the same mix in Q3 versus Q2, and the mix could change more positively into Q4. And then in any case, under -- in the operating margin level, there's continuous improvement plan throughout the year. Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division: I guess one for Guy on EMG side. Just to kind of follow up on a prior question on bookings. It seems like -- with record-level bookings, is it fair to say that it's similar to the strength you saw in the current quarter with coms leading the way, followed by general purpose and then aerospace and defense kind of lagging? Or has that mix from a bookings perspective shifted at all on a sequential basis?

Yes. I would say we saw -- I would stay with what we said months ago is really to stay with the long-term growth or expectation where aerospace, defense were going to be in the flat. ICS, more 4% to 6% and com, 6% to 8% is what we're looking for over the long term. Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division: And so the bookings is matching that level, in essence?

That's what we -- yes, that's what we had in Q2.

Your next question is from the line of Derik De Bruin with Bank of America.

So I just wanted to follow up on something. You said that your LC business was down a little bit, so -- and that yet your Pharma business was up 4% during the quarter. So if could you just -- what -- then where's the strength in Pharma coming from? Is it LC/MS? Or it sounds like your NMR is there. Can you just elaborate on where the strength is in the Pharma business?

Yes. We certainly did pretty well in LC/MS, although not grossly different than LC in Pharma. We sell a lot of products into that market, and so the Pharma customers year-over-year was pretty good, I think partially on the compare. So I'm not sure if I answered your question. But LC and LC/MS were performing not dissimilarly.

Okay. And, Nick, you've talked about some improvements for the 1200 family. Can you talk about that, what you've done in terms of some of the changes there? And I guess once more on sort of sticking with the Pharma theme on are you still at the 12- to 18-month-extension replacement cycle continuing?

Yes, so 2 separate questions. Not to get too deep in product detail, but we did launch a new Quaternary pump in the 1200 family. We continue to extend that family out. That product will be shipping to revenue this month, so we expect to start seeing some results of that product shipping to revenue and hopefully an order momentum that builds from that launch. And then I still am personally thinking that, that replacement cycle window isn't moving. So therefore, I'm still about now 15 months from the point where I get concerned on that replacement cycle.

Great. And then just a couple of quick housekeeping questions. Didier, what are you looking for FX impact in Q3? And what was the M&A impact on the current quarter?

Sure. Q3, we think FX would be unfavorable to the tune of 1.8% based on basically on exchange rate as of the end of April, as we always do. Q2 was unfavorable by 0.4%, and then Q4 would be 1.6%. And on the other question, on the M&A, we do look at -- we do adjust for any kind of organic growth. But the amounts are in the 0-point-something. So I can -- it's between 0% and 0.2% or 0% and 0.3%. Very, very minimum.

Your next question is from the line of Tycho Peterson with JPMorgan. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: First one for Nick, following up on the question a minute ago on Pharma trends. Are you able to talk a little bit about the competitive dynamics in Mass Spec? In other words, are you picking up share? We saw 2 of your peers put up pretty soft March quarter results. So just wondering what the share dynamics are. And can you talk on trends in April versus February and March?

Let me show -- I'll partially answer. I'm not going to answer the share question directly, Tycho, I'm sorry. But in terms of partially answering your question, we really have not seen any pause in terms of the way the Pharma guys are spending on Mass Spec. We've seen good revenue in terms of India in terms of orders. So we didn't see any currency trapping there that looked like it came out of the Pharma sector. In Europe, we continue to see some pretty consistent spend in terms of the Mass Spec and Pharma in general. So we're not seeing any real pause in that marketplace in terms of Pharma. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: Okay. And then for Didier, are you able to quantify the impact of the lunar new year a year ago?

The impact of? Tycho W. Peterson - JP Morgan Chase & Co, Research Division: The lunar new year was this quarter a year ago...

Yes. I mean that was -- basically when we looked at CAG for -- I mean combined CAG and LSG, and Bill mentioned that combined, Varian had a 4% headwind, while currency had 1% unfavorable and then the Chinese New Year was a 1% going the opposite direction. So really at the end of the day, it was all Varian that impacted. And so currency and Chinese New Year kind of offset each other and was very minimum. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: Okay. And then last one, going back to the discussion earlier on incremental margins, I mean I think you've said that, that was almost exclusively mix. But is there a price component there as well? Or are you guys able to hold price in this environment?

I think we continue to do well holding price. But in a slowing market, our competitors are quite competitive. And so I think that we had to prepare for a very competitive environment. We have tough competitors. And as Ron alluded to, we're aggressively ensuring that we continue to have the lowest manufacturing costs in the industry.

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

If I could just follow up on Tycho's question. I did want to ask sort of the same issue in a different way. It sounds like -- if you look back in history, you guys have done a great job taking share in LSG in particular, partially with better pricing dynamic, given your low-cost managing. So is it fair to say that if -- should pricing be a good more of an issue in the back half, you guys prepared to sort of stay in that position selectively? And then secondarily, is there a way to quantify the extent to which market share in general helped your business this quarter in LSG and then in EMG in particular?

Again, in general, we don't make references, as you know, to market share. We just let the numbers speak for themselves. And in fact, we do a very good job of comparing ourselves to the -- our top competitors. And for just the quarter itself, not adjusted, we were roughly at market. Clearly in the last 4 quarters, we have done better than that moving forward. But the competition is tough, and they know what we do, we know what they do, so we need to make sure that we don't take -- make any changes to our overall strategy to drive performance coming out of our R&D teams and ensure that we have the best manufacturing team to be able to compete in what is becoming a tougher market.

And then just secondly, China, obviously none of us have a crystal ball, but wondering if you could give us a little more color on how the order growth in that region looked across your business segments this quarter?

Yes. Normally what we do is we don't give quarter growth by country, but we do provide on-demand visibility on the revenue growth by country. And in China, in fact, Bill mentioned it, it was 13% revenue growth in China, interestingly. And we're talking, by the way, mainland China, so it even excludes Hong Kong. But it's 19% -- it was 19% -- or 19.1% of our revenue this quarter, Q2, so fairly significant. And India was flattish year-over-year in this quarter. And then we saw continuous huge increase in Brazil and Russia. And again, the results of the BRIC strategy that Ron is responsible for, so we're talking close to 50% growth in those 2 countries.

Great. If I could just sneak in one last one on wireless. I think you mentioned some of the dynamics there regarding the gross margin hit. And I'm wondering if, if you look longer term, how would you weigh the dynamics around pricing versus scale as far as improving the margins there?

Well, I think that this market is highly competitive, and they're deal-by-deal, and we have a very disciplined process in terms of what business that we want to take. But there's just a handful of cell phone manufacturers that make the vast majority of the phones, and all these deals are pretty well known. And I think between the operational efficiency that Ron spoke about, the technical expertise they're bringing into market that Guy spoke about, we can compete with anybody.

[Operator Instructions] And your next question is from the line of Richard Eastman with Robert W. Baird. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Just wanted to double back for a second to the local currency or revenue growth rates by region. And, Didier, perhaps you could just -- when I look at the growth rate, 16% in the Americas in LC -- well, obviously, LC. But Europe and Asia, either no growth or down 7%. And I'm curious if any of the 3 businesses, EMG, LSG or CAG, did they show growth in Europe?

Yes. In -- CAG had growth in Europe, and EMG -- in terms of order, sorry, on a constant currency. And in terms of revenue, both CAG and LSG had growth in Europe, even on the nonadjusted for variance, so the growth is even higher.

Yes, the biggest impact in Europe was in EMG. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. So that was down big. And was -- and so order growth in Europe and also in Asia in both LSG and CAG, was order growth a positive number?

Yes. And by the way, also for EMG in Asia. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay, so orders were positive.

Yes, on a currency-adjusted basis, absolutely. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then also can you -- Didier, in the second half of the year, in '12, fiscal '12, you've kind of commented core growth would be, I guess, 6.7%. And when you look at the 3 businesses, business groups, EMG -- are you suggesting that now is in the second half will be more like 5 or 6 number?

Yes, on the core growth -- so core growth excludes both acquisitions, which we know are very, very small, and also the impact of currency. And I've already noted that currency had a negative impact of 1.6% in Q3 -- in Q4, sorry. So the nominal growth will be less than the core growth. The nominal growth that we're expecting is more like close to 4% for EMG and close to 7% for CAG and LSG combined. And the number I was referring to was adjusted for currency, which, again, adds overall 1.6% to margin overall. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. So again, that's unchanged -- it's pretty much unchanged excluding the currency number?

It's -- on a currency-adjusted basis, everything is totally unchanged.

And ladies and gentlemen, we have no other questions at this time, so I'll turn it back over to management for the call.

Okay, Keith, thank you very much. And on behalf of all of the Agilent management team, I'd like to thank everybody for joining us, and have a good day. Goodbye.

All right, ladies and gentlemen. That will conclude today's conference. Thank you for joining us, and you may now disconnect. Everyone have a great day.