Agilent Technologies, Inc. (A) Q3 2014 Earnings Report, Transcript and Summary

Alicia Rodriguez - Vice President of Investor Relations William P. Sullivan - Chief Executive Officer, President, Executive Director and Member of Executive Committee Ronald S. Nersesian - Executive Vice President, Chief Executive Officer of Electronic Measurement Group and President of Electronic Measurement Group Didier Hirsch - Chief Financial Officer and Senior Vice President Guy Sene - Senior Vice President and President Electronic Measurement Group Fred A. Strohmeier - Senior Vice President and President of Agilent's Life Sciences & Diagnostics Group Michael R. McMullen - Senior Vice President and President of the Chemical Analysis Group Neil Dougherty - Chief Financial Officer

Daniel L. Leonard - Leerink Swann LLC, Research Division Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division Patrick M. Newton - Stifel, Nicolaus & Company, Incorporated, Research Division Isaac Ro - Goldman Sachs Group Inc., Research Division S. Brandon Couillard - Jefferies LLC, Research Division Ross Muken - ISI Group Inc., Research Division Daniel Anthony Arias - Citigroup Inc, Research Division Douglas Schenkel - Cowen and Company, LLC, Research Division Jonathan P. Groberg - Macquarie Research Bryan Kipp - Janney Montgomery Scott LLC, Research Division Derik De Bruin - BofA Merrill Lynch, Research Division Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Good day, ladies and gentlemen, and welcome to the Agilent Technologies Inc. Fiscal Third Quarter 2014 Earnings Conference Call. [Operator Instructions] Please note, today's conference is being recorded. I would now like to hand the conference over to Alicia Rodriguez, Vice President of Investor Relations. Please go ahead.

Thank you, Karen, and welcome, everyone, to Agilent's Third Quarter Conference Call for Fiscal Year 2014. With me are: Bill Sullivan, Agilent President and CEO; Ron Nersesian, Keysight President and CEO; and Didier Hirsch, Agilent Senior Vice President and CFO. Joining in the Q&A after Didier's comments will be the Presidents of Agilent's Life Sciences, Diagnostics and Applied Markets, or LDA, businesses, Mike McMullen and Fred Strohmeier. Also joining from Keysight will be Neil Dougherty, CFO; and Guy Séné, Senior Vice President of Measurement Solutions and Worldwide Sales. You can find the press release and information to supplement today's discussion on our website at www.investor.agilent.com. While there, please click on the link for Financial Results under the Financial Information tab. There you will find an investor presentation, along with revenue breakouts, business segment results and historical financials for Agilent's operations. We will also post a copy of the prepared remarks following this call. Today's comments by Bill, Ron and Didier will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. We will make forward-looking statements about the financial performance of the company and the separation of the Electronic Measurement business. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. Lastly, we expect this to be the final quarter in which we conduct a joint conference call for both Agilent and Keysight. We expect the company's separation to be finalized in early November, after which Keysight will operate and report as an independent company. And now I'd like to turn the call over to Bill.

Thanks, Alicia, and hello, everyone. Today Agilent reported third quarter revenues of $1.77 billion, an increase of 7% versus last year and above the high end of guidance. Orders of $1.74 billion were up 9% over a year ago. Adjusted earnings of $0.78 per share also exceeded the high end of guidance and increased 15% over last year. Operating margin was 19.2%, up 90 basis points from the third quarter of fiscal 2013. Both Keysight and LDA delivered on revenue and earnings commitments. In most end markets, we saw continued improvement and good order growth across both businesses. Our work to split the company continues to go very well. On August 1, Keysight began operating as a wholly-owned subsidiary of Agilent. We expect the separation of the company to be completed by early November as planned. Today, I will share performance highlights of LDA, or the life science, diagnostics and applied market businesses that comprise Agilent moving forward. Following my remarks, Ron will share performance highlights for Keysight. Finally, Didier will provide a more detailed discussion of Agilent's overall financial results, as well as our guidance for the fiscal fourth quarter. Turning to LDA. Third quarter revenues came in at $1.01 billion, up 6% over a year ago or 5% on a core basis. Orders grew 10% to $1.02 billion or 9% on a core basis. Operating margin was 19%, up 50 basis points from last year. In our Diagnostics and Clinical markets, revenue grew 6%, with strength in array CGH, target enrichment, as well as demand for pathology products in the U.S. and Europe. Revenue from analytical lab markets also grew 6% in Q3. We were pleased with the growth we saw across our instruments, services and consumables portfolio fueled by new offerings to the marketplace. Within the Life Science and Applied markets that make up Analytical Laboratories, Pharma/Biotech was up 8%, led by midsized and specialized Pharma customers. Life Sciences Research was up 4%, posting the best year-over-year growth in 2 years. Results were driven by increased government spending on capital equipment in the U.S. and Europe. Government spending also was the catalyst behind 16% growth in Environmental and 12% growth in Forensics. In Food, revenues were up 4% over last year as results in the U.S. and Europe were offset by the impact of the FDA restructuring in China. Chemical and Energy revenues were relatively flat, growing 1%, largely due to softer demand from China versus a year ago. Geographically, economic recovery and government funding drove growth in the Americas and Europe, up 6% and 8%, respectively. Asia Pacific grew 4%. China continues to work through government agency reorganizations, which is resulting in a longer approval cycle. Turning to the business segments within LDA. Life Science and Diagnostics Group's revenue grew 5%. Orders grew 11%, with broad strength across LDG products. Operating margin was almost 16%, down slightly from last year and up 260 basis points from last quarter. LDG introduced a number of new products in the quarter. One highlight was the 6495 LC Triple Quad Mass Spectrometer which provides higher sensitivity, robustness and reliability. Another highlight was the introduction of the IQFISH work flow for bone marrow and custom FISH service through Sure Design. Both FISH products provide high-quality results with significantly shorter turnaround times -- from 16 hours to 2.5 hours in the case of the IQFISH. LDG also signed a development and commercialization agreement with Merck & Co. for a companion diagnostics device, using Dako's IHC solutions with Merck & Co.'s anti-PD-L1 cancer drug. In the Chemical Analysis Group, revenues and orders increased 8%. Operating margin was over 23%, up 180 basis points from a year ago. CAG announced the 5100 ICP-OES in July. The new product runs analyses 55% faster and uses 50% less gas per sample than competitive systems. The 5100 is suited to applications in Environmental, Food, Energy and Pharmaceutical markets. CAG's recently introduced 7010 GC Triple-Quad Mass Spectrometer, targeted for the Food Safety market, lowers costs and improves ease of use compared to current high-resolution mass spec systems. The 7010 significantly strengthens Agilent's market position with a range of pricing options, performance and productivity benefits. In July, the Cary 700 Universal Spectrophotometer was named a 2014 R&D 100 Award winner. The award recognizes the 100 most technically significant products introduced in the marketplace over the past year. This award marks the third consecutive year Agilent's spectrophotometers have been recognized as R&D 100 Award winners. In 2013, the Agilent 8800 Triple Quad ICP-MS won the award and the Agilent 4100 Microwave Plasma-Atomic Emission Spectrophotometer won in 2012. These awards demonstrate the benefit of our investment in spectroscopy. Looking forward to Q4, we expect mid single-digit growth across LDA as we continue to build on our order momentum, gain traction with new products and drive manufacturing cost reduction. We remain committed to creating shareholder value through: increasing our organic growth rate by leveraging Agilent's strength in the analytical lab into the fast-growing genomics and diagnostic markets; continuing to differentiate through best-in-class tools, workflow solutions and customer experience; and finally, expanding operating margins and return on invested capital consistent with our long-term operating model. Turning to guidance, LDA revenues for the fiscal fourth quarter of 2014 are expected to be between $1.07 billion to $1.09 billion or 6.2% core growth at the midpoint. We expect operating margins at the midpoint of 21.1%. For the full year, we expect LDA revenue in a range from $4.07 billion to $4.09 billion, with operating margins at the midpoint of 19%. Didier will provide additional details in his remarks. Thank you for being on the call. I will now turn it over to Ron to talk about Keysight and the Electronic Measurement business.

Thank you, Bill, and hello, everyone. I'm pleased to report that Keysight had a very good quarter and we continue to focus on returning to market growth rates while meeting operating margin expectations. Turning to our performance, I will start by highlighting 3 key headlines from Keysight's third quarter. First, Q3 revenues came in at the top end of our guidance range and operating margins were above expectations. Second, our overall outlook and forecast for the second half remains unchanged despite potential disruption from geopolitical, macroeconomic and company-separation risks. And third as Bill mentioned, we began operating as Keysight Technologies on August 1 and remain on track to be fully separate from Agilent in November. Now let's move to the specifics. Keysight revenues of $757 million increased 8% year-over-year while orders of $722 million were up 7%, resulting in a book-to-bill ratio of 0.95. Keysight continues to deliver solid profit margins, generating operating profit of $149 million for the quarter, which corresponds to an operating margin of 20%. Last quarter, we highlighted the operational separation of Keysight that occurred on August 1. This was a massive step that had the potential to impact the timing of customer shipments. In fact, some customers requested early deliveries to ensure no delays during our transition, and this moved some revenue from Q4 into Q3. As we have consistently noted throughout the year, we expected our Aerospace and Defense and Communications markets to grow in the second half. These markets were the drivers of Keysight's Q3 growth, but strength in these markets were offset in the Industrial and Computer markets. Aerospace and Defense revenue grew 13% this quarter with strengths in both government and prime contractor business as well as regional strength in the Americas and Asia. Communications revenue grew 16% in Q3. Wireless basestation and component manufacturing were strong. However, handset manufacturing was weak as customer buying power and increased competition accelerated price erosion in that business. Industrial Computers and Semiconductor revenue was flat year-over-year. Continued strength in semiconductor end markets was offset by the softer computer business. On a regional basis, revenues grew year-over-year in all regions, with the exception of Japan. Europe grew 16% versus a soft compare last year; Asia Pacific excluding Japan, improved 11%, with positive growth across nearly all segments; the Americas grew 8%; while Japan declined 13% due to declines in government aerospace and defense spending. Overall, Keysight continues to invest in the transformation of our product portfolio with a focus on modular, software and certain wireless solutions. Aligned with this focus, in Q3, Keysight was awarded the Global Frost & Sullivan Award for Growth Excellence Leadership in the PXI instrumentation market. We also announced a strategic partnership to collaborate in early 5G research with China Mobile, the world's largest mobile network operator, and we announced participation in the Korea 5G Forum. Keysight introduced new products in the quarter, including our modular Bit Error Rate Tester, which provides a new level of scalability and flexibility for the fast-paced, high-speed digital markets. In addition, in July, we began volume shipments of our PXI vector signal analyzer. It is the world's fastest and most accurate microwave vector signal analyzer that significantly reduces test times across a wide range of applications and markets. As you know, Keysight began operating as a subsidiary of Agilent on August 1 and we expect to complete the spinoff in early November. Our focus throughout this journey is to make this significant transition as seamless as possible for our customers. Our successful results to date are due to the hard work of our employees, who are implementing a separation plan that includes working closely with thousands of customers to coordinate our shipments and delivery plans in this transition period. I am very pleased with their achievement so far. Turning to the outlook for the remainder of the year, we are facing several headwinds in a handful of areas, most notably Russia. Our sales to Russia have represented 3% of Keysight's total revenue. The volatile political environment, as well as new export restrictions on certain products, may halt growth in one of our fastest-growing regions. Despite the geopolitical, macroeconomic and company-separation risks, we are reiterating our second half and annual guidance. We expect the FY '14 revenues to be in the range of $2.91 billion to $2.95 billion which represents 2% core growth at the midpoint. We have tightened the range but the midpoint is the same as we have communicated last quarter. Similarly, our expectation for full year operating margin remains unchanged at 18.9% at the midpoint. This implies Q4 revenues are expected to be in the range of $740 million to $780 million with operating margins at the midpoint of 20.5%. I will now turn it over to Didier to provide the details of Agilent's overall financial results.

Thank you, Ron, and hello, everyone. To recap the quarter, orders grew 9% year-over-year, revenues grew 7%, and our revenue of $1.766 billion operating margin of 19.2% and EPS of $0.78 were all higher than the high end of our guidance. Please note that Q3 core revenue growth by segment and by geography is reported in the slide deck posted on our website. This quarter, currency added about 0.6 percentage points to our year-over-year revenue growth and acquisitions had no material impact. We bought back $50 million of stock in Q3, redeemed $500 million of debt and generated $28 million in operating cash flow. This is lower than traditional for 3 main reasons: number one, we prepaid about $60 million of supplier invoices at the end of July as we will not make any payment in the early part of August; number two, we paid $29 million for the redemption of the 2015 notes and also prepaid the current interest on that note; and number three, pre-separation expenses amounted to over $60 million. I will now turn to the guidance for our fourth quarter. We expect Q4 revenues of $1.81 billion to $1.85 billion and EPS of $0.87 to $0.91. At midpoint, revenue will grow 6.5% and EPS, 10%. Our 21% projected operating margin at midpoint will be 180 basis points higher than Q3 fiscal year '14 and 60 basis points higher than Q4 of last year. While we are maintaining our spending discipline, we're also investing in key growth initiatives. We expect to generate about -- over $300 million of operating cash flow in Q4 and incur about $60 million of pre-separation costs. Now to the fiscal year 2014. The fiscal year '14 guidance at midpoint remains the same as previously communicated, but we are narrowing the range. We expect fiscal year '14 revenues to range from $6.99 billion to $7.03 billion and fiscal year '14 EPS to range from $3.04 to $3.08. With that, I'll turn it over to Alicia for the Q&A.

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

[Operator Instructions] Our first question comes from the line of Dan Leonard from Leerink.

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

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

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

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

And our next question comes from the line of Richard Eastman from Robert W. Baird. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Just a quick question. When you look at China in total, and maybe, Ron, I'm thinking more on the Key [ph] side of the business. Could you just kind of speak to the tone in China and in Japan as well, just Asia in general, and how that looks over the next 3 to 6 months?

Sure. First, I'll start with China. We've seen hot basestation manufacturing orders as -- and we've also seen strong orders for components. On the handset side and handset manufacturing, there has been considerable price pressure and that market has undergone some real price erosion. But overall in China, our business looks pretty solid. We have seen some increases on export restrictions for China, as well as Russia, and that has affected our business a little bit. With regard to Japan, the government has not been funding any new programs that we're aware of for satellites or defense work, and that has led to a continued soft environment. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: And just one thought is this -- as you know, Apple -- I know we don't talk customers, but the last time there were some fairly significant share shift. It was attributed to Apple basically. And as they ramp up on the iPhone 6, can you -- is the test content into that automation and production run, which they want to start in September, is the test content considerably less than it was as they ramped up on the previous generation? Or has pricing eroded to a point where it does not have as significant of an impact on the industry in general?

I'm sorry, Richard, I'm not allowed to comment on particular customers' buying or test strategies. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then just -- well, let me just ask, the PXI VSA that you just started shipping, that is a bench top instrument.

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

Our next question comes from the line of Patrick Newton from Stifel. Patrick M. Newton - Stifel, Nicolaus & Company, Incorporated, Research Division: I guess, Ron, your 4Q op margin guidance for Keysight of 20.5% is above the high end of your market growth model that you laid out at the Analyst Day, and I'm wondering if you could discuss what dynamics are driving this upside. And I assume mix is helping and then can you talk about the sustainability of this elevated margin?

Sure. Well overall, first of all, we had predicted 8% growth in the second half. We delivered 8% in Q3 and if you look at the midpoint of our guidance, it's 8% in Q4. We did have very high incrementals above the middle of our guidance during this last quarter, but we do need to still invest in this multiyear transformation to get our product line growing at market and then eventually above market. But the guidance that we just gave right now factors everything in place. Don't forget Q4 is seasonally a strong quarter which basically when you have a significant amount of fixed costs drives higher margins. Patrick M. Newton - Stifel, Nicolaus & Company, Incorporated, Research Division: Great, and then just shifting gears to basestation strength that you talked about in your prepared remarks. Can you talk about that on a geographic basis, and when we look at LTE and TD LTE markets in China, I'm curious how this market is faring relative to expectations and the kind of visibility or duration that you're expecting from these deployments.

Sure. Well, first of all, the basestation build that is obviously 4G and TD LTE for China, et cetera, and FTE [ph] for the rest of the world. But we see players in Europe and in Asia that are doing this. So when you look at some of the major players that are centered out of Europe, we see strength and then we also see strength in China in Asia in the basestation market. Patrick M. Newton - Stifel, Nicolaus & Company, Incorporated, Research Division: Any comment on the visibility or duration at this point?

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

Well, the only other thing I could add on is the fact that especially the whole -- the 3 operators in China are now starting to deploy 4G. So that's the trend that is going to be here for probably a few years, but with ups and downs at the capacity we'll have to build.

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

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

Yes, I'll give an overview comment and then turn it over to Mike and Fred to comment in their respective businesses. But my first warning is, I've always had, is you really have to look at the overall performance of the marketplace as a rolling 4 quarters, and again, we're very happy with the performance in Q3. I'm particularly pleased with the rebound from Fred's business from last quarter. I mean, if there is anything in the last quarter that we had is that the growth in revenue in the Life Science side was below expectations. And so that's really the story from my mind is that we've got great order momentum across all of Fred's product lines going forward, and I'll have him comment on that. And of course, Mike's business just continues to roll along. I mean, we are the leader in the applied side of the market. We have a lot of competition because people see that but his team is just doing an outstanding job of holding and if not growing position. But I'll turn it over to Fred, and I'm going to flip the order, put -- go to Fred, because it really is the biggest change sequentially, and then turn it over to Mike.

Thanks, Bill. I think we are very pleased with the results we're seeing from all the platforms, I mean, almost across the board, starting on the top, I mean, the LC/MS growth rebounded quite significantly over the last 4 to 5 months after a pretty difficult fiscal year '13. And so we are confident that the new products are really pushing our business forward, starting with the new triple quad which we have introduced at ASMS. And also the single quad which we introduced is keeping up very well against the competition, by the way, really nice growth there. Secondly, we are seeing informatics as a key element. And as we have talked several times about it, increased investments there, informatics is really growing along with that and is pulling instrumentation with it. And third piece is in the classic instrumentation piece is the LCs, which are growing nicely as well from a revenue perspective. And turning to the pieces actually Mike owns but assigned to the Life Science business. Consumables and services were strong as well. So turning over to the genomics and diagnostics space, we saw really significant growth in the genomics space, predominantly driven by the target enrichment of the assembly preparation [ph] for next-generation sequencing. We saw solid growth in the space of pathology, mainly driven by the IQFISH with a few things we have introduced there, which are real significant advantage from a customer's perspective. And we also saw the companion diagnostic rolling at the rate we were expecting. And finally, the companion diagnostic. Also the contract with Merck, they have signed, but we are seeing an increasing demand on companion diagnostic, which is in line with what we are seeing in the market in general.

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

I'm going to turn it back to Mike, if you don't mind, to answer the first question, because again, he's got a great story on the applied side from a market perspective. And then our China business for LDA was flat. Again, Asia was up 4%, China down -- or Japan down a little bit, China, flat. And so we obviously had a very strong non-China Asia performance. I'm going to have Mike talk a little about his products and then comment on China because a lot of his is in China. But our China business was flat for LDA in the context of overall strong Asia that was up 4%. Obviously, China dominates that performance. And then after Mike answers, I'll have it turn it over to Ron to talk about China specifically for Keysight.

Thanks, Isaac, for the earlier question. So first of all building on Fred's commentary about the drivers for a quarter which we're very pleased with in terms of both the revenue and the incoming order rate, we saw this strong services and consumables performance in this CAG segment space for Q3. But we're also seeing the growth being driven by the new product introductions we have been making over the last several quarters and the past year or so, from our introductions in the mass spectrometry area, on GC/MS and ICP-MS, and as you saw in the earnings call, we highlighted that we got one other what I believe to be an award-winning product in the spectroscopy area. So we saw strong growth in the mass spectrometry business both gas space and inorganic side, as well as our base of spectroscopy business. So the innovative products we're bringing to market are actually driving growth, and this was in an environment where we had a challenged market situation in China. So I think it's fairly well publicized. The food ministries, reorganizations are underway. I think it's taking longer for those to settle out and for them to get organized and really get the procurement side going in terms of the new purchases. So we were delighted with the results of these type of growth rates and in a market, as Bill described, it was relatively flat in China. Ron?

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

And our next question comes from the line of Brandon Couillard from Jefferies.

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

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

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

Our stated strategy to date as we had talked about is to, first of all, ensure that we keep our bondholders whole and reduce the debt to ensure that we can maintain our investment grade. We're also committed to making a dividend payment of $130 million, which we believe will be roughly the same percentage dividend as what it was before under Agilent. Stating that, the new Agilent is very, very profitable and has very high cash flow. Our priority continues to be to look on ways to invest in the business. But I've been very clear that we have to digest a lot with the separation, the acquisitions that we have made, and we will continue to work with the Board of Directors to figure out the best way to return cash back to our shareholders.

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

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

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

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

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

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

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

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

Fred, why don't you take that one, please?

Yes, what we are seeing is, in general, a rebound in the different geographies. I think the business is coming back honestly on easy compare relative to last year. I mean, I just can give you a few numbers. Worldwide academic research spending is pretty much flat in Europe, according to our information. China is spending about 12% growth in government funding. However, all [ph] to the things Mike was highlighting, this picture is distorted, so that probably some of the money is spent towards the later part of the year and the U.S. is growing in about 2%. So overall I think it is a situation where we can say that it's a relief in this market overall and we are seeing that in our order pattern as well.

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

That's a good question. We still see big pharma still not loosening their clutches completely. I mean, we are done seeing the big deals we have seen in the past. I think the growth, as Bill has outlined, is coming off of mid to small companies. I mean, the reason for that is they are still in the situation of potential consolidation going on. But there's also the patent cliff for small molecules. Even that is almost over and we are seeing a new trend in Europe, for example, that companies, traditional companies, are starting generic businesses after a lot of that business has been moved to India. And this helps, of course, the pharma market in general. But your specific question about big pharma, I would say this is not yet completely there.

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

Just I guess a quick cleanup on the China dynamic. Would you be willing to quantify what percentage of total sales is exposed to this government-related, as well as the, I guess, the China FDA reorganization challenges in China.

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

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

And I'm again just defining anything the government effectively controls, the investment strategy is effectively government-owned. And again if you look at -- I mean, the food industry, the pharmaceutical industry and the chemical industry, it's all highly government-impacted. And so they really do make those fundamental decisions at the end of the day. And so if you take our definition, then it is essentially 100% driven by government decision.

Okay. And then I just want to I guess follow up on that by asking, I guess on one hand, it doesn't sound like you're expecting that to come back in Q4. On the other hand, at the end of last quarter, you talked about strong order momentum in China. You said that again I think this quarter. I believe you typically don't count something as an order unless you expect it to be fulfilled within about 6 months. So I'm just trying to reconcile these seemingly contradictory dynamics. And if my understanding is correct, are you trying to basically say that you do expect China to come back, but it may not be this quarter, it may be, say, Q1 of next year based on what you're seeing from an order standpoint?

Yes, I think that all of us are in the conventional wisdom that -- or a conventional view of thought that organizational changes are relatively straightforward. And that China continues to be the most -- the country with the greatest growth opportunities that we have. Every quarter, you're a little bit disappointed. I think as Mike said, exactly right, I mean, we're confident in the future, you just never know how the funding breaks. And you see that in the defense business, in Ron's business. So I think we're in a position of -- the guidance that we have is our best forecast of what's going to happen in China, so we're not expecting obviously any miracles, and we'll just have to play it out. The good news is, is that in Asia overall, our business is pretty good. In other parts of Asia, we've been quite successful. And we'll keep our fingers crossed and hope that Q4, the bottleneck breaks and we get stronger momentum going into '15.

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

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

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

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

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

Yes, exactly right. But I'll let Neil give some color commentary.

Yes, so I would echo exactly what Bill just said. So as we move from quarter-to-quarter, the mix of our products, the mix of our sales has a pretty significant impact on our gross margins. And the other point that's certainly relevant, as Ron mentioned in the script, is the price erosion that we see in certain markets, most notably in the wireless manufacturing space over the past several years, if you're looking at multiple-year trends, has impacted gross margins.

And I'll just make some high-level comments, again, Jon, if you have additional details, the guys can give an answer. But LDG is by far the most competitive market that we have. I mean, our base comes from the applied. I think we continue to make great progress in Life Science and Diagnostics. The overall gross margin is solid. I would say very, very competitive in the market. But it is the most competitive market that we have moving forward. We have to win. I'm absolutely convinced this will continue to be the long-term growth engine of the company. But this is where the investment is, this is where by far, the most competition is. Fortunately on Mike's team, on the Applied side, continues to do a superlative job. And you can really see the investment that we have made in spectroscopy and again, I alluded to it, and I'll put the plug in, we have systematically redesigned every Varian product line that we received since 2010. And so the NMR, as we said in the past, which is counted in Fred's gross margin, is behind that. We've introduced one product but we really have to turn the product line one more time. But spectroscopy, we're basically done, not only did we spend the money to do it right, secondly, the market sees it. We're winning the awards that indicate how successful we have with the Varian engineers working together with the Agilent engineers to really develop a great product. And so I think in summary, I think the differential change has been the progress we made on the spectroscopy side.

I guess, just to follow up quickly on that, Bill. I guess, thinking about LDA overall as you go forward, I guess my question was around, you highlighted that there are a lot of opportunities on the gross margin side there given, in particular some of the other product lines that you just mentioned from Varian. Are we -- I guess, kind of has anything changed in terms of what you think the potential of that could be over the next 2 to 3 years, given what you're seeing rolling now? Or is it going to take a little bit longer or is everything on track? I'm just trying to understand I guess the timing of these improvements.

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

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

Sure. If you look at the -- sure, I'll just break down by some of the segments. The semiconductor market looks good as they moved to some 20-nanometer pitches. The industrial market looks relatively flattish. The computer market itself is not growing very rapidly from all of the tablet conversion from PCs. In communications, we are seeing a buildout of the infrastructure in basestations, and that certainly helps as people move over to 4G. But there is massive handset manufacturing test pressure on pricing. As more people have entered into the market and people have been very, very aggressive on pricing, that really affects the attractiveness of that market. In aerospace/defense as we saw a nice rebound, a 13% growth in this past quarter, that's from a free up from some of the spending that we saw last quarter and we expect to continue into Q4 with the end of the U.S. fiscal year. So overall on the markets, what we had talked about last year, we see communications a little bit better than the 2% growth that we outlined last quarter for fiscal year '14. We see also the aerospace/defense doing a little bit better than what we had outlined, but we do not see the industrial and computer segment tracking to the 5% that we outlined. So 2 segments are a little bit up, 1 segment is down and net-net, that gives us to our 8% growth for the half.

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

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

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

I think we are seeing, as I said before, we are seeing pharma, in general, the big pharma probably more restrained than the smaller ones. I think the product portfolio we have at the moment is really ideally suited at this point in time to enter this market. I think with the new introductions in the LC space and in the LC/MS space, I think we have made inroads in that and the driving force is increasing productivity. These are the reasons why customers even under tight pressure are deciding to move on to purchase instruments in these times. And I think particular in India, I think we're seeing an uptick. The growth in the market overall, we are seeing there the total market is probably at double-digit market growth at this point in time. And so yes, we are hoping that and are optimistic that the big pharma spending starts continuing towards the end of this year.

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

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

Okay. And then, Mike, if I can do a quick follow-up. I know U.S. refining capacity has been pretty strong to start the year. U.S. is I think you guys have alluded to, has been not robust but it's has been steady grower for you all to start the year, hasn't been too crazy. Color around that and then I didn't see anything on the Middle East. Is that starting to fall off a little bit or be more flat, are you still seeing support there?

Yes, great question. Thanks for the opportunity to provide additional color. So let's maybe start with the Middle East. That part of the world continues to be a very strong growth region for us. They're investing in capacity in-country, moving -- trying to move higher end of the value chain of refined products. So that area is growing nicely for us. And in the U.S., I think the commentary is still relatively the same as last quarter, which was overall, the industry has probably never been healthier in the U.S. fueled by the low-cost of the fuel stocks from shale gas. And we're seeing plans by our major customers to add infrastructure, build capacity. That hasn't yet come online and translated into new business. So the business is still a steady grower, but I think as the profit pools continue to grow and invest, I think we could look toward a healthier investment environment for us down the road.

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

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

No. We will report Agilent results with Keysight in Q4. We will discuss in the earnings call the new Agilent going forward. And Ron and team will have a separate investor call afterwards to talk about the results of Q4 and their guidance for FY '15.

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

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

Exactly.

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

I think that's actually a good question. I think we are winning against our competitors at the moment, particularly the product is refilling [ph] just by the fact that our product is more universally usable, and it's more flexible in the application space. It can be deployed and I think that's the major difference between the product, which actually is also from a price perspective, very competitive, and I think those 2 factors are driving the growth in the total single quad market, but also particular against this instrument.

Great. And I guess is this driving new system placements for LC as well or is it just basically...

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

Great. And then just one quick question. On the PDL1 ligand, the companion diagnostic. How do we -- I've had a number of questions from investors about how to sort of think about the size of that market and that opportunity for companion diagnostic. Can you give us some color around that, and I guess relate that to maybe what your experience was sort of with the [indiscernible]

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

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

I mean just one anecdotal information, if you look to the development of new drugs at the moment, I think a big part of the drugs, and if you correlate that with the success of the drugs in the clinics, it's correlating with companion diagnostic, which is codeveloped basically with the drug itself. And I think this is the opportunity afterwards beyond the service business, as Bill just said.

And our final question for today comes from the line of Tycho Peterson from JPMorgan. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: Ron, I'm wondering, you mentioned revenue pull forward for Keysight ahead of the official go live date on August 1. Is there any way you can quantify that?

Yes, it was approximately $15 million, which would have put us right around the midpoint of our guidance. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: Okay. And then is there any chance you guys might be wanting to comment at all on '15? I mean if we look -- the Street's, I think, 5% core for LDG and 5.5% for EMG. Ron, you just talked about the market growing 2.5% to 3%. So as we think out there for next year any preliminary thoughts?

We're going to have to wait to next earnings call before we give the '15 guidance moving forward. And also I think it's important not speaking for Ron, but working with his new board to make sure that everyone's aligned for their guidance in '15, and likewise with our board. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: Okay. And then lastly, you explicitly in the pathology talked about Europe being strong. Can you maybe just talk to the dynamics there and then what was going on in the U.S. and if there was a reason that wasn't called out today?

In terms of on the LDA side, you mean? Tycho W. Peterson - JP Morgan Chase & Co, Research Division: Correct.

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

I think you see a tremendous tick-up in our sales in Europe and this is mainly driven through the product categories I have been talking about. And it's across the market, so including Mike's markets as well. And we see the academia [ph] government for the reasons I have given before also picking up. And I believe it is the pharmaceutical industry which drives growth, even though we don't see the full potential yet, so I'm optimistic that this trend really continues.

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

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

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

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