Agilent Technologies Inc. (NYSE:A)
March 07, 2013 8:30 am ET
William P. Sullivan - Chief Executive Officer, Executive Director and Member of Executive Committee
Ronald S. Nersesian - President and Chief Operating Officer
Didier Hirsch - Chief Financial Officer and Senior Vice President
Lars Holmkvist - Senior Vice President and President of Diagnostics & Genomics Group
Michael R. McMullen - Senior Vice President and President of The Chemical Analysis Group
Nicolas H. Roelofs - Senior Vice President and President of The Life Sciences Group
Guy Sene - Senior Vice President and President Electronic Measurement Group
Soon Chai Gooi - Senior Vice President of Order Fulfillment and Supply Chain
Daniel Arias - UBS Investment Bank, Research Division
Daniel Brennan - Morgan Stanley, Research Division
Amit Bhalla - Citigroup Inc, Research Division
Tycho W. Peterson - JP Morgan Chase & Co, Research Division
Vamil Divan - Crédit Suisse AG, Research Division
Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division
Derik De Bruin - BofA Merrill Lynch, Research Division
Mark Douglass - Longbow Research LLC
Paul R. Knight - Credit Agricole Securities (NYSE:USA) Inc., Research Division
Charles Anthony Butler - Barclays Capital, Research Division
Joel Kaufman - Goldman Sachs Group Inc., Research Division
Okay. If all of you would please take your seats, we'll get started. We'd like to thank all of you for coming today, for attending Agilent's Annual Analyst Day. Especially given the weather, we really appreciate you making the time and the effort to be here.
Okay. Before going into the agenda, let me spend a little time on Safe Harbor. This is a statement that you all are very familiar with, so I won't go into a lot of detail at all. What I wanted to do is just emphasize that we will be talking about forward-looking statements today and that those numbers, projections that we give are only as good or good as of today and that we do not have an obligation to update them. If you have any questions about Safe Harbor, please let Elena or myself know.
Agenda. So we're planning to be out of here by 12:30. If all goes as planned, this is how it should work. So we'll kick the day off with Bill Sullivan, our CEO, giving you an overview of Agilent. Then he'll turn the reins over to Ron Nersesian, our Chief Operating Officer, who will give both an operational and a strategic update. Didier, our CFO, will follow with a financial review. And then we'll open the floor here up for questions for about 20 minutes for Q&A and that should take us to roughly 9:45 and then we will have a short break. At 10:00, we'll resume and Lars will kick off our in-depth business presentations given by each of the group presidents and Soon Chai will wrap that up with Agilent order fulfillment organization update. That should then take us to roughly about 12:20 and then Bill will give the close and the summary and we should be finished, if all goes as planned, by 12:30. We'd like to let you know that we'll also have some boxed lunches available for you to take on your way as you leave the meeting today. And with that, let me turn the meeting over to Bill.
William P. Sullivan
Thank you, Alicia. Again, welcome, everyone, to Agilent's Analyst Day. It's a real pleasure for the management team to be here and what we'd like to do is give an update on how we see the market, how we are investing going through a slower period of time and how we believe that Agilent can get back into its operating model range.
So again this is a picture of the presenters from today. Again, very, very pleased to have Ron and Didier here, that's well known. Lars Holmkvist, won't you stand up. You've never have met Lars, but Lars came from us, the Dako acquisition. Very, very pleased that we've been able to combine our Genomics business together with our Dako acquisition and we're off to a great start and after the break, Lars will be first up to talk about the exciting opportunities that we have together as a result of the acquisition.
Again, Mike McMullen, I know that you know, that runs our Chemical Analysis business. Nick Roelofs, again, our Life Sciences business. Guy Sene, again on the Electronic Measurement and Gooi Soon Chai, who, again, manages all of our Order Fulfillment business. And so again, since the last time I was here, we've created this fourth group. Net result of the acquisitions and continued success of our Varian acquisition. Last year, we did about $6.9 million, 20% operating profit, the highest in our history and operational cash flow of $1.2 billion.
If you look at our performance since the 2009 downturn, clearly, we came out of that downturn with very, very aggressive organic growth rate. And we continue to drive the Agilent operating model and drove actually above our stated goals in terms of incrementals moving forward. We drove our EPS moving forward. We were able to continue to expand in Life Science market and as a result, the Dako acquisition actually expanded our served available market to $54 billion. In addition to that, as you know, we announced Ron, a year ago, as COO. We also have recently announced him as the President and CEO of the company moving forward. So a lot of changes.
The big news, of course, is in 2012 is our organic growth rate slowed down and the forecast that we have given for 2013 is for flat to slightly negative organic growth rate. And so the question, of course, is what happened? And there's several reasons. Obviously, the macroeconomic environment has slowed moving forward. I often joked -- 2 years ago, I said that the growth rate in U.S. and Europe, at best, would be 2% GDP. Many of you in this room said that I was being far too pessimistic and in hindsight, I think, I was too optimistic in hindsight given the continued problems in Europe and the U.S. modeling forward.
I'm still in a view of model forward economy moving forward. Didier will talk about some of our macroeconomic assumptions that we have, but we don't have any particularly different view. There's still -- than what conventional wisdom is moving forward, but nonetheless, it's going to be a slower growth environment. As a result of that, the competitive pressures for every deal are a lot higher and, again, there's always a balance of what deal you take versus the operating profit that you want to be able to maintain. In addition to that, for us, the mix has not been great.
As you know 70% of our business is in capital equipment, so we're going to see a lot more volatility than some of our other peers in this segment, just because of our exposure to capital equipment. Secondly, a couple of our segments and regions are in difficulty. Aerospace and Defense has been flat for last 4 quarters and in Japan, in local currency, which is 10% of the company, is down 5%. And so you take Aerospace and Defense at 10% of the company flat. Japan, down 5%. As I said, some of the mix has not been the greatest, coupled with our high exposure to capital equipment. But nevertheless, I do believe that we are positioned to be able to grow our sales back into our operating model.
And so our strategy, moving forward, is very, very straightforward. We are going to continue to get back to our organic growth rate. We are going to continue to invest in market expansion and in Research & Development. I know many companies have made the decision to be able to start cutting expenses in this slow growth environment but in this case,
I just think it's an absolutely wrong thing to do and I'll just share with you 2 simple examples: First of all, Dako. As you know, the Dako acquisition is all about revenue synergy. It's all about taking the best of Agilent, investing in what is a great franchise and Dako expanding into Asia was going to be able to get the growth rates that we had. And again, Lars, in a few minutes, will be able to talk about that, but this is an area where we cannot take our foot off the accelerator.
We continue to expand in Asia, we continue to make investments just recently and I know Lars will talk about it. Yesterday or day before yesterday, we announced new autostainer in Baltimore and, again, to rave reviews. And we are going to continue that investment. On the flip side of it is, is in Electronic Measurement Group, which, right now, is under the most pressure, not only do we have to maintain our investment to ensure that we have the very best feature-rich instruments and, again, we've been the leader in that market.
The large part of the market are in the spectrum analyzers, noise [ph] sources, networking analyzers and oscilloscopes, but we must be able to offer our customers a very, very credible modular instrument solution. And this is an area that, quite frankly, we have not made the long-term investments last year and, again, this is the first time that we will really go into a lot of deal, go into a lot of depth in modular instrumentation. Last year, we spent incremental $75 million, 20% of our R&D budgets in modules.
This year, we'll spent almost $80 million incrementally in EMG. In my belief, we cannot turn away from that. We are absolutely committed to have the highest performing modular instrumentation product offerings in the industry and even though EMG is going through a slower part of -- the slowest part of our business, we cannot take our foot off the accelerator as we move forward. Even though we are going to continue to expand in emerging markets, we are going to continue our R&D investment.
We continue to aggressively focus on improving our gross margins. And as you know, a year ago, Ron, combined all of the order fulfillment under Soon Chai. And for the first time, Soon Chai and Ron will talk about the progress that we're making in this space. We've identified the ability to reduce our manufacturing cost about $180 million over the next 3 years. About 1/3 of that is complete and we are aggressively consolidating sites, leveraging our logistics, leveraging our procurement processes, reengineering products to be able to drive cost out, transferring products to low-cost countries. And as a result of that, we are very, very confident, even in an environment of stiff pricing competition, that we can, in fact, improve our gross margins.
And finally, needless to say, Lars and myself and, again, Lars and his team is doing all the work. He's ensured Dako's success. It was the biggest acquisition in our history. I'm highly confident that we will create value from this acquisition moving forward for our shareholders. I couldn't be more pleased in the progress that we have made in terms of integrating the teams together. I think just a testament of Lars taking over our Genomics business with Dako is an example of how well the 2 teams have moved together and we just have enormous number of exciting products in the pipeline, the ability of combining the organizations and moving in such areas as companion diagnostics.
I just think that we're very well positioned. So in closing, the messages that we are going to continue to invest in key R&D efforts, we're going to continue to expand our presence in emerging markets, continue to drive manufacturing costs lower and ensure that Dako, in fact, is a great return for the $2.1 billion that we spent. So with that, what I'd like to do is turn it over to Ron to talk about actually the mechanics of what's going on and how we are allocating resources. What is he focusing on in particular on the day-to-day management of the company? Ron?
Ronald S. Nersesian
Thank you, Bill, and good morning, everyone. Today, I'd like to get a chance to talk to you about what our strategy is for growth, not only on the top line, but, obviously, on the bottom line. In particular, the first part of our strategy is making sure we have make the right bets and that we have a customer-focused approach to where we allocate our resources, where the mega trends are going and how we want to change the mix of our portfolio.
The second thing after that is to make sure that we innovate and differentiate our solutions that we provide our customers with the absolute best measurement capability that exists and to provide them with a differentiated solution not only in technology, but in the whole value delivery system. Third, we're about operational efficiency and Soon Chai will get a chance to talk about that and some of the improvements that we've made, but that's a big part of making sure that we accelerate our margin expansion. And last, we want to make sure that we always have the absolute best team and that we continue to expand our skills and capabilities.
So first, if we take a look at the overview of Agilent. As Bill had mentioned earlier, our market size is approximately $54 billion now with a long-term market growth of 4% to 6%. As Bill had mentioned, we had an operating margin of 20% in 2012 and you're starting to see some of the benefits from all the work that we've done with the Varian portfolio and to continue to improve the Varian portfolio, as well as the rest of our business to generate that record operating margin.
As you can see, we've added a fourth group, the Diagnostics and Genomics group, or what we call DGG, headed up by Lars that Bill introduced just a little while ago. This revenue for DGG only shows a partial year due to the acquisition timing of Dako and this year, it will be well over $600 million. But that is really a very strong addition to Agilent. It provides a recurring revenue base for us, it has excellent growth potential, it brings capability in not only in getting into have a channel with the pathologist to make sure that we can address the clinic, but also bringing the regulatory capability to not only the Dako portfolio, but to the genomics portfolio that Lars also leads up.
The Chemical Analysis and Life Sciences business produced over 20% operating margin last year and I'm glad to say that the Life Sciences portfolio, although it delivered 15% operating margin last year, there's one division in particular that Nick Roelofs will talk about and that is the NMR and MRI division from Varian and we're starting to see some really good traction on the improvements there although that will be a longer-term effort.
If you separate that division out and look at the portfolio in LSG, which includes LCs, LC/MS, all the auto sampling capabilities, software capability and others, the portfolio produced 19% operating margin last year and is heading well into below 20% daily. So we are focused on that one division, as well as making sure that you'll see improved operating margin from Life Sciences over the next 2 years. And in particular, you'll see this in Didier's remarks.
Next year, we see operating margin at over 18% and then the following year, we'll be over 20%. But this is where I'm really excited about going forward, making sure that we make the right bets and we invest where there is a great mega trends that points to a very strong secular growth rate as well as areas in which we can go ahead and differentiate ourselves. So first of all, we spent about 10% of revenue in R&D and that strong investment, I think, will drive our organic growth rate. There's no doubt, in the short-term, we have some macroeconomic headwinds, but we're full steam ahead in making sure we can deliver on these investments.
We have about 3,000 employees that are leading the effort in R&D. We also have other engineers that are working in other functions such as manufacturing to make sure that we bring these products to market or what we call, new product engineers. So when you compare a company to company, the number of people in R&D is not always the same as other people could allocate or account for their R&D investment in different ways. But overall, you can see the percent of revenue that we spent in R&D by each group and let me get a chance to talk about each of them.
So as I mentioned in Diagnostics, this is a real powerful opportunity for us, not only does it make sure that we increase our recurring revenue, we go after a growth market in Diagnostics, but it also brings that channel of getting to the pathologist to our clinical channel from Dako and leverage it into the Genomics work that we're doing. So we have invested and created technology on synthetic, the synthetic SureFISH probes and that is something that we'll benefit from this acquisition that's beyond the traditional Dako investment.
In Chemical Analysis, energy. The demands for energy have never been greater as we see the Third World countries and emerging markets continue to demand more energy and we have been the market leader in gas chromatographs, which are very, very critical in this market segment. Not only that with the acquisition of Varian, we have gone ahead and we have improved the portfolio by adding Spectroscopy products. So for instance, there's a new FTIR product, which allows you to go out into the field and make a very quick, rapid measurement to look at the quality of oil through the exploration process and through the manufacturing process. And this modular and very quick solution is something that we intend to build on.
The reputation that has been built up in the GC marketplace continues to be leveraged into this new product line area. Third, Pharma and Academic. There is no doubt that there is great opportunity in both of these areas and we've made tremendous progress not only with our LCs, but especially with our LC/MS product line and portfolio. This will continue to be a very, very strong part of our future and Nick Roelofs will talk about that and, specifically, what we're doing in that area.
And in EMG, there are 2 major trends: Mobility and Communication. In Mobility, we see all types of wireless communication that exists not only from handsets, from basic phones, but obviously, smartphones, which are crossing over and, which are now are as big as the general feature phones in the marketplace, but all types of wireless devices. And we play in all parts of the ecosystem in that area from the infrastructure, where there are base stations and there are backhaul, on the high-speed electronics or in computation, as well as playing in the handset market.
If we look at the overall market segments, we play in R&D and manufacturing as the 2 main market segments in the infrastructure. And in the handset market, we play in R&D and we are going after selective opportunities where there are very good margins and opportunities on the manufacturing side. As Bill had mentioned, we, not only are the leader in the highest performing segment, we're the largest segment, the 1 box solutions or the feature-rich boxes, but we have expanded our portfolio into the modular space.
We've made this a very dedicated effort, starting back in 2009. We've introduced over 75 products and we have a very full roadmap that will present some very, very strong introductions in the future and the growth in this segment for us has been excellent. Another part of our overall resource allocation is making sure that we continue to expand the recurring revenue.
This year, with the acquisition of Dako, our recurring revenue is up to 30% from approximately 25% just a year ago. And as you can see, we're seeing this type of recurring revenue in all groups and that can be anything from chemistries, reagents, supplies, we see software updates that are also included and service & support. So we continue to expand this space to try to limit our volatility.
We play in certain markets, we differentiate in those markets and we'll continue to be there, but we want to make sure that over time, that this is a growing percentage of our portfolio. In addition, we sell software that is not included in recurring revenue that is about $300 million per year. And those are software packages that get added to different product to get new capabilities.
The other part of our strategy is to expand in emerging markets and as you can see, our compound annual growth in emerging markets has been 28% over the last 4 years. Now these emerging markets, mainly the BRIC markets, account for 29% of our revenue as we saw in FY '12. If you do include Korea, Taiwan, Hong Kong and Singapore, 38% of our business are in this broader definition of emerging markets. This continues to be a big part of our strategy and we continue to expand in this area, adding new offices, as well as new capabilities of centers of excellence for our customers.
The last thing I'd like to comment on is leveraging Agilent's leadership. We have 2 ways in which we leverage our resources throughout the company. The first, by centralized functions, where we leverage things from a common function to multiple groups. The second way in which we do this is we go ahead and leverage capabilities developed in one group and utilize it in another group or many other groups.
Here are couple of examples of what we've done. In the technology space, some of the technology that was developed in EMG and CAG were used to go ahead and make us a leader in LC and a growing leader in the LC/MS product line. We've utilized technology that was used in our custom metal machining area in Electronic Measurement, as well as other areas in the technology development or key technology development centers.
We've also gone ahead and leverage the work that has been done in LSG, in the actual microarrays and leverage that further into our SureFISH product line that was taken further by the labs. And now that is part of DGG and they will move further, leveraging that product or that product line. On top of that order fulfillment is a very big part of our leverage.
A little bit over a year ago, we announced the creation of an Agilent order fulfillment organization and as Bill had mentioned, we have plans to generate $180 million worth of savings with about 1/3 of it done. Right now, we have achieved $56 million worth of savings in FY '12 and we will deliver another $50 million worth of savings in FY '13 and $75 million over the following 2 years. Soon Chai will go into the details in that area, but by going ahead and making sure we leverage the supply chain, the manufacturing capability and the overall logistics chain, we've been able to go ahead and create plans to deliver this $180 million worth of savings.
We also leverage IT and real estate. Sometimes it's done with other companies, other times, it's not. But in particular, some of the facilities that we have set up in Asia are very key to the rapid expansion of Dako, and they are utilizing the facilities that are Agilent wide in Asia and that will help accelerate the growth for Dako. On top of that, we've gone ahead and open up new sales offices in other areas and that will provide -- create opportunities in Vietnam and in other markets, where each group, individually, did not have enough critical mass to move into an area, but when we combine them together, it enables us to move more quickly into these areas.
So in summary, the first part of our strategy to win is to make sure that we pick the right bets and we invest in markets that will provide great opportunities. On top of that, not only do we look at these markets from a customer perspective, in general, on a global basis, we make sure that we go after and we have a full force going after emerging markets. Beyond that, we're not just providing boxes, we're providing complete solutions whether it be from sample prep solutions at the beginning of the process or chemistries and reagents through our instruments through service & support at the end And our solutions are broadening, not just from feature-rich boxes, but also through modular solutions and mobile or handheld solutions that Guy will talk about in a little bit later this morning.
On top of that, we have gross margin improvements that you will see across the businesses not only in LSG and CAG, but across all of the businesses that we have. And, of course, the world-class team is critical to delivering these results and you'll hear from the leaders from each of the businesses. So with that, I'd like to turn it over to Didier, who will share with you our financial plans.
Yes. Good morning. So let me start drawing your attention that in the next 3 slides, I will present Agilent in total projections, financial projections, as of early February and they correspond to the high end of the guidance and this is not to say, in any way, shape or form, it doesn't imply any modification to the guidance that was provided on February 14. Okay.
So let me hit on the key points of our performance for 2012 and in 2013. 2012, a reminder that I enjoy reminding you of, that operating margin and earnings per share were records for Agilent in our history, and that our year-over-year organic incremental -- organic margin incremental was 73%, way higher than what we committed to in our operating model, which at 4% revenue growth, calls for 20% operating -- incremental operating margin, we delivered 73%. So how did we deliver 73% of operating margin on just 2% -- very weak 2% revenue growth?
Three important factors: Number one, the Agilent order fulfillment organization, that Soon Chai delivered $56 million in cost savings; number two, there was a $62 million reduction in variable pay; and number three, we started implementing cost controls as early as Q1 of fiscal year '12. So those 3 factors together allowed us to achieve this record operating margin and, again, way higher than the operating model. And the last thing I'd like to note about 2012, at 20.2% operating margin, only one of our competitors has a better operating margin and that's Waters.
We are beating all other competitors and many of them by quite a wide margin. Now fiscal year '13 will be our second year of weak revenue growth and the second year of clamp down on our expenses. And that includes also hiring -- very strict hiring controls. Our variable pay in 2013 will be half of what it was in 2012 and 1/3 of what it was one year ago. And so if you take the average Agilent employee and they looked at their paycheck in 2011, in 2013, they would have seen a reduction in overall compensation between -- over 2 years period. So they had really chipped in to allow the company to achieve those excellent operating margin.
And then last month, we implemented even deeper cuts and we implemented those deeper cuts as a hedge because of the uncertainty about the world economy. So hedged to our guidance. And all in all, our curves are even more severe than what we implemented in 2009. And at that time, operating margin were 1/3 of what the operating margins are today. And an additional comment is that Soon Chai will go over is, in addition to delivering $56 million of savings last year, he's committed to deliver $50 million of savings, which is in our guidance, in fiscal year '13 and more in the years to come.
So the message is short of doing things that would negatively impact our short and long-term growth opportunities, we are doing everything that we need to do, we're determined to deliver on our operating model, both on top line, but also on the bottom line. So this slide shows our financial projections under a base scenario and a downside scenario for this year and the coming 3 years. And our assumption is that after 2 years of really, really tough economic environment that we will enjoy a more normal context -- economic context in the years to come, some kind of reversion to the mean. And obviously, easier compares. And in addition, that will return to outgrowing our markets.
So as you can see from the slides, we are committed to deliver higher year-over-year operating margin than what is in our operating model under either the base scenario or the low growth -- the downside scenario. And as a reminder, again, our operating model calls for 20% year-over-year operating margin improvements at 4% revenue growth and at 8%, 36%. And you see the numbers in front of you higher under either scenario, even on lower revenue growth than what is in our operating model.
So how will we deliver on this performance? Well, 2 very key actions we need to take. First, we need to fix our NMR, MRI division and Nick will talk more about that. And second, Soon Chai and his Agilent order fulfillment organization have to deliver, on average, about $40 million of margin expansion every year for the coming 3 years. So the last thing I would note on that slide is that, as much as we have benefited from our flexible cost structure and the savings in our variable pay in the last 2 years as you can imagine, as we grow our return invested capital, which is metric for paying for the payout, we will face headwinds, which are in this model as variable pay, hopefully, will go up correspondingly.
Next slide is very, very busy backup slide. I'm not going to go over any of the numbers there, but I expect you wanted to see what was the background for the overall Agilent financial projection. So you have it here by segment and I'm sure there will be questions for me or the Presidents on those commitments later on.
And last slide, capital deployment. So there's no chance to our commitment, both in terms of how we create value, both organically and inorganically, and how we distribute the value in terms of the dividends and the buyback. As you know, we have raised the dividend 20% at the beginning of the calendar year. We have also -- the Board has also approved up to $500 million of buyback, which we started putting to good use and we -- in terms of the strategy, we do intend to maintain our strong investments, create rating, and again, continue to apply all the U.S. cash to dividend and share repurchases and then look at opportunities to create value, obviously, both organically and inorganically in diagnostic and biological markets.
With that, I think, Bill and Ron, you're going to join me for a Q&A.
Daniel Arias - UBS Investment Bank, Research Division
Dan Arias from UBS. Question for Didier on guidance. Didier, I think that the high end of your guidance range of 7.1 did not include a sequestration assumption, and obviously we've crossed over there on March 1. So can you just reconcile the top end there with what's coming out of Washington?
So yes, in the high end of our guidance, 7.1, we assume very, very strict government control from the spending. Not a full sequester in the U.S. but something that's still -- might -- is still -- is something that is possible. We're obviously in unchartered territory now. We know we have a sequester for a few days. We don't know how long it's going to last, so I would say the high-end of the guidance is still very, very strong possibility that we will face tough cuts in the government spending, but not to the level of a full sequester.
William P. Sullivan
And to make a comment just along that area, in February, typically, we have just begun the quarter and the revenue in February was roughly flat, slightly down year-over-year and, again, we had some obvious benefit from Dako. The orders were, in fact, low. Part of that of course, was because the Chinese New Year in Asia, you know how much business that we have in Asia. But the Aerospace and Defense business in February in the U.S. was down quite a bit. And how much of that was anticipation? What's going on? We don't know. But clearly, in fairness, we have seen some signs in the U.S. in February related to defense spending.
Daniel Arias - UBS Investment Bank, Research Division
Didier, on the longer-term base case and low growth scenarios, can you just elaborate on what that assumes for global GDP growth?
Yes. We have -- we are assuming something close to the 4% in the 3.8%, 3.9%, 4% for those 3 years and that allows for -- and obviously, the -- any additional point of GDP adds about 5 to 6 percentage points of revenue. So we're extraordinarily sensitive to the macroeconomic environment. But based on let's say 4% GDP growth, our markets could grow 4%, 5.5% to 6% and the 7% that I've shown from the base case is our commitment to outgrow our market based on investments we're making in R&D. Now in the downside scenario, I didn't split the hair in 3. I didn't try to see, I just put that number about 3%, assuming defense will stay really, really tough in the U.S. Obviously, that could imply that for another 2 or 3 years, the world economy would only grow probably around 3% -- 2.5% to 3%. There will be still competitive pressures on pricing and things like that. So it implies all kinds of things that you would not expect to see after 2 years of very, very tough macroeconomic environment. You would expect at some point in time a reversal to the mean. But the intent of the downside scenario is not to say we believe that's going to happen, whatever it is. It's just to show if it happens on the top line, this is what we would do to ensure that the bottom line were delivering the operating margin incremental that we've committed to and even more and thanks, [ph] mostly because the $50 million -- the $40 million per year that Soon Chai has committed to fixing the NMR and RPD kind of business has nothing to do with the macroeconomic environment and it will kick in under any kind of scenario, whether it's a base scenario or the downside scenario and that's why you get to pretty good incrementals even in the downside scenario.
Daniel Brennan - Morgan Stanley, Research Division
I have a question. This is Dan Brennan from Morgan Stanley. For Ron and Bill, Ron, you have this slide up there discussing the synergies across your different businesses and I think with the difficulty and the underperformance, it's showing on top line in the last year, I think there's been more inquiries regarding really the synergies between test and measurement and your other businesses and certainly, that's where Agilent came out of HP, so that's your core. But Ron, nonetheless maybe could you provide some more concrete examples about the real synergies and kind of capabilities that EMG had to other businesses? And then secondarily, for the investor that kind of struggles to figure out how these businesses fit together, it does appear -- that seems to be a discounted valuation arguably in the stock price. So Bill, how would you answer that in terms of the value that's being created that you're benefiting versus this, seeing maybe discounted valuation that occurs because of these 2 disparate businesses together?
Ronald S. Nersesian
Sure. Well, first of all, we're a measurement company and our big differentiator is really understanding multiple aspects of measurement and being able to apply those across multiple industries. I'll give you -- one example is if you look at the A-to-D converter technology that is used and was developed for the EMG products that you see at the heart of oscilloscopes, that technology is what has been used and deployed into our LCs and GC products. So we've actually taken technology for data acquisition or data converters and have applied that more broadly across our chromatograph product lines and our mass spec product lines. So that is a very concrete example of something that was developed there. Another example, it's in a completely different area, is in order fulfillment. So the capability that Soon Chai has developed has been developed in Electronic Measurements for over a decade and that is being applied to LSG and CAG right now. So that's second area. But there are many technologies that are used and that are shared throughout our businesses. Another one that I was mentioning earlier as we have very, very high precision metal machining that is used to move around high-frequency signals, that's also something that could be utilized to move around very high pressured fluids or gases, and that is being used -- it was first developed for the electronic signals and now has been applied first in the GCs and now in the LC product line. So those capabilities that have given us that type of precision and support. And as we look at integrated biology in the future where you see multiple disciplines coming together, it's really important for us to share that technology as we go down and we look at things that all -- eventually all get down to an electronic signal where there's an electronic bias and be able to apply those across the board, but we are very concrete examples on the technology side, also on the order fulfillment side that are utilized in multiple businesses.
William P. Sullivan
In 2005, when I became CEO, we've made a decision to move from a diversified technology company to one that was going to focus 100% on measurement, what Hewlett-Packard started in 1939 and yet I've been HP and Agilent for over half that period of time. And measurement science, as Ron said, is all about taking this physical world, turn it to digital format to be able to write engineers and sciences information for discovery. And so we've looked at this overall market at $54 billion. So at that period of time, today, we look at that, that period of time, we essentially divested $3 billion of the company. In the process over this period of time, we've added -- if we're successful in 2013, we've added $1.5 billion worth of organic growth, $1.5 billion through acquisition. And so roughly, we'll be $7.1 billion. I am absolutely convinced that without the leverage of the technology, the scale and the financial power that Agilent have, we would not be a credible company in this space. Over this period of time, you have seen a consolidation of the market, you've seen industrial companies moving to the space because it is a very high operating margin business and I believe if that -- we did not have the scale, the leverage that we've been able to execute on, we would not be where we are today. It is as simple as that. There's not a chance that we can even think about moving to diagnostic space and to be able to make an acquisition like Dako without the financial strength that we have had. The penalty we pay, yes, as EMG is more volatile than the rest of the business. But through this period of time, I am absolutely convinced that our cash generation, our size has allowed us to compete against anybody in this market moving forward. And you know there are very, very few players left in this space that are small and as a result of that, we believe, even at $7 billion, that we can compete with anybody in this market moving forward. And so the big challenge we have and I have been very, very clear on this and Ron talked about it, we need to have a less capital exposure and more reoccurring revenue and we will continue to make that investment, that is our strategy moving forward. We would have a completely different conversation now if, in fact, that we were able to have 40% or 50% recurring revenue, which would in fact, dampen our exposure into the capital and business moving forward. Even the investment that we're making at module instrumentation that in fact, will in fact, be able to -- smaller deals, less expensive, but again, you know the people who make modules. It's a much less volatile business and we will continue to do that, but not give up the scale that we have, the levers that we have to compete in what I believe will be continued consolidation of the measurement market.
Daniel Brennan - Morgan Stanley, Research Division
Maybe as we look at the operating model you sort of laid out through 2016, one of the key focus points is on sort of organic incrementals. And more recently, in the financial results, the reported decrementals have been more significant and some of that's due to some of the strategic investments in the diagnostic business. As I look at sort of the more detailed model, it seems like a lot of the forward margin trajectory growth you're going to get is going to be from the recovery of that unit through 2016. So theoretically, as we go from kind of the negative core organic growth that we're having today to positive and we start to get some of the flow-through on Dako and the general business for Diagnostics, should the reported incrementals, not organic, but reported sort of necessarily be better than sort of that 30% to 40% range? Or do you think all in all, in reported basis, we'll still be somewhere in that ballpark?
Right. We've continuously raised the bar in operating model. I was doing an exercise recently over the weekend just looking at -- we created that operating model, the first one back, in 2008 and if ever you would be interested, I can share that slide and showing how our operating model evolved from 2000 until now. And who knows if sometime in the next 3 years, we won't raise the bar. I have no idea. Already, the numbers that I presented today are higher than our commitment as per the operating model we just presented last year. So I'll leave it at that for the moment.
Daniel Brennan - Morgan Stanley, Research Division
Okay. Maybe as a follow up. As you look back and you said this has been sort of an evolving model, obviously, the more near term, medium term results have been a little bit more choppy than probably all of us would like and some of it's been some of these macro events sort of come out. As you sort of thought about how you sort of kind of did versus the last 2, 3 years, operating model that you've presented at the Analyst Day, how did sort of that influence how you were thinking about what you were going present today and how comfortable you feel in the relative low to high range that you sort of laid out on the slides here?
Well, certainly, I mean, the operating model is well embedded in the culture, if not just 3 of us and the President, but also all 35 product line General Manager. And it is something that we try to achieve on a day in, day out basis and again, a lot of people in the company and I mentioned what the employees -- their participation also and they understand the upside and downside to the operating model. I mean -- I'd like to go a little bit on 2013, where we clearly are not meeting operating model commitments and I try to explain and I hope it came out selectively [indiscernible], not at all defensive. But we started significant cost control activities back 4 quarters ago, 5 quarters ago, in fact. And that is why in 2013 through 2012, we had an exceptional operating model incremental on very, very low revenue growth, way over above our commitment. Now 2013, we are putting more cost controls in place, more as a hedge and it is not in our guidance, but it's to ensure that we achieve all our guidance commitment. So it's kind of tough to look at one year separate from the other one, especially that we saved also $62 million in the variable pay back in 2012. There's more variable base savings in '14, '13 but not as much. So I think you have to look at all those factors.
William P. Sullivan
And for my mind, the arithmetic is real simple. To get back to flat earnings, we have to cut $58 million of additional expenses out of sales and marketing and R&D, it's about 600 or 650 people in the United States. Arithmetic is simple. Here's the problem that I have and it's very, very clear. What's the first thing we do? Well, we got this incremental spending, an $80 million in modules, let's stop doing that, we haven't been doing it for 30 years, let's not do it again. That's the easy thing to do, I personally believe, even given the macroeconomic risk, making those cuts now, slowing down Dako, slowing down expansion and emerging markets is just the crazy thing to do. And in know I maybe the anomaly in this, where, right now, the easiest thing to do, it's real easy to terminate people to be able to get the $58 million. It's a very simple arithmetic issue. The problem I have is and we held our R&D coming out of the recession 2008, 2009 and we not only capitalized on the upturn, we dramatically outgrew the market on the upturn. And I think at this point of our history, we need to be able to continue that investment moving forward and maybe wrong if in fact, the economy doesn't turn around, the congress doesn't turn around, we have a long history of making tough decisions in terms of being able to resize that. Ron completely changed the whole way that EMG and in fact, the profitability of EMG when he managed it directly, and [ph]carrying on in those footsteps. But I believe right now, just are recurrently taking the $58 million out, you cut out all the new stuff and yes, the numbers may look great in the short term, but I think it puts Agilent a competitive disadvantage going on time and we have decided not to do that.
Just looking at -- what I'm going to call, it says Page 17, I don't know how that matches up with your slides. I just want to try to reconcile the core dot-dot with what you really think is going to happen because you mentioned in the dot-dot M&A and FX. I mean, I'd like to sort of get an understanding as to what your assumptions are because those are big issues. I mean, I'm not trying to pin a number down, whether there's going to be an X or Y, but how much of the revenue growth in either scenario would come from some kind of acquisition, if any, and also EPS, which is non-GAAP, how much are you assuming for amortization? And then my last question is how much share repurchase goes into those assumptions?
Sure. So on the 3 questions that you have, there's 0 inorganic growth in that model, so it's all organic growth. The second thing is that we -- I have assumed that more than [ph] flat share count at the level of the average of 349 million shares, dividend share count similar to the expectation for this fiscal year and then in terms of the amortization of intangible, I think, about -- I mean, it's basically -- I mean, I don't know if the -- the schedule is available [ph] in the 10-K, but it's really based on what has already been acquired that we performed out of the intangible...
So no change?
No additional, no.
No change. I mean, in terms -- so the bottom line matches the top line meaning that no acquisitions, no amortization, just we're just talking [ph] about apples-to-apples, right?
William P. Sullivan
And the other comment I would make on this, this organic growth rate, if you'd look at our industry and take the top 10 or 15 competitors, right now, the last 4 quarters, the growth rate is in the 2% to 3% organic growth rate. As I shared with you, I would argue and again, not come across as defensive, we got some bad breaks in terms of where we're strong and versus where the market is moving forward, but these numbers in the low end aren't delusional in the sense of -- look -- if you look at where the overall market is based on the existing mix moving forward, any sort of second half, continued improvement in the U.S., hopefully Europe gets a little bit better and continued growth in emerging markets getting into 4% organic growth rate is not unrealistic whatsoever.
And something that's perhaps I should have said at the previous question also in terms of how come we cannot deliver even more than what is in this -- more for the next 3 years. A reminder again, that a variable place in our favor when in a downside, but then in a recovery, you do have to deliver on your commitment. And by the end of 2016, for example, our return on invested capital, I didn’t show it there, but it's 23%. 23% is fairly close to 25%, at which point we pay 10% variable pay. So that is embedded in the model and that is break in a way in terms of our operating leverage or margin expansion in the upside, but at the same time, it helps in the downside.
So 2 quick questions. One, Didier, just to be clear on -- in February, it sounds like you said you implemented some new cost savings. I just want to be clear. Was that not in the guidance that you gave on the call or was that in the guidance and can you quantify what that is? Remember, last year, for example, you said about 1/2 your costs were flexible. Obviously, some of that's a variable pay that you've mentioned, but maybe let us know how much more you've kind of cut there on the flexible side? And then the second question for either Ron or Bill is if I look at this it looks like going forward, your lowest organic growth assumptions are in EMG and yet it's almost one of the highest in terms of what you're spending in R&D. So can we maybe just talk about how you kind of -- you're thinking about that top down, how you justify the expense and R&D given the lower organic growth?
Sure. So on the first part of your questions around this -- so there's no chance to what we said during the earnings call and I think you are the one who asked the question also about the hedge and Bill answered yes, we had just implemented an incremental set of measures. I tend to call them fairly drastic. Bill says no, it's not that drastic, said the draconian [ph]. But we are and [indiscernible] everything, travel, to give you an example. All executives who used to travel business now travel economy throughout the world, no exception. On Markham, on temporary workers, so a lot of action. I'm not going to quantify them. Just beyond that, they are not in our guidance per se, but they might be used and might be useful if there's any kind of dysfunctional situation in the macroeconomic front. So it is not -- it is to help us to ensure that we're going to achieve our guidance, and I'll leave it at that.
William P. Sullivan
With regard to the R&D percentage, the most important thing is making sure we're getting the return and looking at our operating margin that we deliver into the businesses and the return on invested capital. In certain markets, the competition is very different. If you look at our R&D percent versus the peers and the Electronic Measurement space, we're right there and actually below some of our competitors in our key markets as far as what we're investing. But on a dollar-wise basis, we're above due to our scale. But we look at that and say, "What do we have to do to compete in order to generate that revenue stream that's there?" And there is a lot of turnover in the EMG business, such as new technologies come out very frequently, whether in the wireless market, people move from 2G to 2.5G, to 3G, 3.5G, 3.9, all the way up to the LTEs and 4Gs, there's a lot of R&D that's necessary, but we don't spend it in that area unless we get the gross margin and we can deliver operating margin on the bottom line. So we used to see operating margin peak out at 14%, in 2008 and 2011 and now, last year, it was 23% and we're talking over 20%. So the R&D percent that we've put in really says, "Are we going to get a return on the overall bottom line and it makes sense for that business." And when you compare it to our peers, I think we're spending adequately and I wouldn't spend less than put us at a disadvantage without the ability to keep on top of our competition, but on the other hand, I wouldn't spend more and make sure we deliver the strong operating margin on the bottom line.
Ronald S. Nersesian
And just to restate, $80 million or almost $78 million, they spent on modules and [indiscernible] modules, easy number to cut out. We must be able to do that and be credible in providing that solution to our customers and that's 20% of that budget and real simple. Easy answer, answers your question, fix the problem and just focus on feature-rich instruments. I think that it will be a bad strategy for EMG and Guy will go through exactly where we are in this but we will in fact, make a difference in that market, but it is pure incremental choice on top of the existing business to protect our core.
Amit Bhalla - Citigroup Inc, Research Division
Amit Bhalla from Citi. I know each of the business heads or probably talking more detail about the plans for market share, et cetera, but when you look at the 2014 to 2016 operating model, can you just talk to us about -- at a high level what your underlying assumption is for price given, Bill, that you talked about stiff price competition, competition on every deal? So what's the overall assumption on price and market share going forward?
William P. Sullivan
Anytime that you get back to more nominal market growth is enough opportunity for everybody, so as a result of that, you don't have some of the big deals where the buyer has the pressure moving forward. And again, many of you know, I come originally from the semiconductor industry, so the pricing in this industry is nothing compared to the semiconductor industry, but the typical change in discounts are probably in the 1 or 2 -- go back to a normal type of discounting, which have been an improvement 1 or 2 points of discount.
Tycho W. Peterson - JP Morgan Chase & Co, Research Division
Tycho Peterson, JPMorgan. Just a question on NMR. You said the improvement in that business isn't related to macro. If we look back before, LSG had up margins of 19% in '12. In your low growth scenario that you lay out, you get the 18% operating margins in that segment 3 years from now. So can you just talk to what you're implying for NMR margins?
Nick will cover that, but we are expecting NMR to return to breakeven towards the end of fiscal year '14. And obviously, it generates some profit going forward, but the assumption, we need to fix the NMR and Nick will talk about the actions that we are taking there.
William P. Sullivan
And also I think one comment, I got to make sure the reference point gets reorganized and the Genomics business used to be part of Nick's is now with Lars and that inherently has had a higher gross margin. So I want to make sure that the number you're quoting is restated appropriately.
Tycho W. Peterson - JP Morgan Chase & Co, Research Division
And then as we think about the incremental investments you need to make in Dako and Genomics more broadly to build that channel, can you talk about how much of that will be a redeployment of maybe some of the overfunding you've done in the Life Sciences business?
William P. Sullivan
Well, in terms of the DGG and the Diagnostics, well, we've been very, very clear. We increased the R&D spending and the expansion of the field of -- well over $10 million. There's another $10 million incremental investment just because of the continued investment in R&D and Dako and expanding into Asia. Again, another investment easy to cut, easy to stop. I personally believe and obviously, we made the decision -- wrong decision to do.
Vamil Divan - Crédit Suisse AG, Research Division
Vamil Divan from Crédit Suisse. So just a question again, a follow-up on the sequester. I know it is early days we're just kind of getting into and you mentioned about not wanting to make cuts, just to kind of meet the short-term, but if it says something that seems to be extending out, which feels like it is going to be from what we're hearing for several months. Can you think about just -- can you talk about what you're thinking in terms of when you need to make adjustments in your investment, especially with -- the Aerospace and Defense might be seeing some challenges already?
William P. Sullivan
Yes. Well, right now, quite frankly, we're just caught between a rock and a hard spot. I mean in Aerospace and Defense's cut, we're a leader obviously, the only real U.S.-based microwave provider. And how do you not have the next-generation microwave devices? And so that's the promise that you have. Obviously, Guy and the team, we're going to reallocate resources to where other opportunities are, but the fund to be a continued leader and particularly in a market, that demands the very best, it is very, very hard I think just to make short-term cuts and you just manage through it. As we said, we lowered the low-end of our range, assuming that -- I said on the call that you have a minus 10% Aerospace and Defense scenario, a minus 20% scenario, we've modeled it in terms of the businesses. But how can you not be a leader in the technology and particularly in the systems, because again, our focus is on radar systems and missile guidance systems as an example and operational surveillance. I just don't know how you not ensure that you continue to have a leadership position. It's actually one of the largest -- 10% of the company, it's one of the largest market share segments for us. And so you're just caught in the short-term and I just think it would be not prudent to stop development on new products because of a political stalemate in Washington that I think will get sorted out one way or another, right? It's going to set up politically or unfortunately, there could be another event that drives increased spending.
Vamil Divan - Crédit Suisse AG, Research Division
And just a second question on the recurring revenues. You talked a lot about wanting to increase your exposure and you've done a nice job with some of the acquisitions. How much could you do internally to drive that percentage higher as opposed to just needing to do more deals?
William P. Sullivan
What I'll do -- in terms of doing that, to change the needle a lot, you've got to do it through acquisition. Lars will talk about what we're doing in terms of the diagnostics, Mike and Nick will talk about in service and support moving forward. But quite frankly, without the acquisitions, that's the only thing that has really driven where we are to 30%. I just think that the ratio of renewable to our hardware kind of grows symmetrically. And without additional acquisitions, it's going to be hard to move the needle.
Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division
Patrick Newton, Stifel, Nicolaus. Clearly, your elevating modular instrumentation this morning is a platform with an EMG. You said you made $75 million in R&D investments in fiscal year 2012. I'm trying to understand what percentage of EMG revenue is currently derived from modular instrumentation. And then I believe you made a statement that there will $80 million in incremental investments in 2013. Was that off the 2011 base, meaning an additional $5 million or does that mean you're taking your modular instrumentation to $155 million?
William P. Sullivan
No, we're only spending $350 million, but I'm just saying the investment will be closer to $80 million after $75 million. And this is the issue, you'll see in the packets that will show the growth, we haven't stated the absolute number. Quite frankly, it's still small. It's always a catch 22. This market is still dominated by big, feature-rich instruments, particularly in R&D and the labs. And then module business has been a slow steady growth for the last 30 years moving forward, and it's one of these issues where if we don't make that investment, we believe that our customers -- we're not going to be able to provide our customers with the breadth of measurement solutions they want. It's starting to show up on the radar screen, it's being measurable. And again, Guy will talk about it but it still small. So one of the issues of do you invest now for the future or you say, "Hey, do I just keep delaying the future?" And then as a result of that, you're not able to provide the total spectrum of measurement solutions to your customers and we've made the decision that -- we've made a decision that we're going to invest through the slowdown. Again, the last 10 years has been difficult for EMG, the optics boom and bust, you had the financial crisis in 2009. And so when you have 2 big use disruptions, it is real easy not to invest in the future and we just have to invest to a slowdown to make sure that we're -- we have credible product offerings and we're making enormous progress in EMG in this area.
Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division
So can you talk about the enormous progress? And I think Ron you'd said you're seeing excellent growth off of this base. Can you help us understand? I think that these modular instruments have been growing about a 15% CAGR over the last several years. Can you help us understand how that -- is this additive to the EMG portfolio or is this part of the contribution that you invest in this newer growth [ph] area that perhaps could be slowing your EMG organic growth?
Ronald S. Nersesian
Well, first of all, as far as the investment, 2009 was our first big step where we really decided to go forward and we formed the division in that area. And then during the last year, we've taken that up to the new level, which gets to this roughly $75 million per year. That's embedded in Guy's overall growth. What we see is, in certain cases, the feature-rich box will always be the center point, it is very important. In other cases, people want modular solutions for speed in some cases and because of the actual footprint and because of the software control and other cases, where large percentage of the time, there's a mix that's in there because the capability is always in boxes. So we see a percentage of the market that will shift from feature-rich boxes for a percentage of the growth that will move over to the modular instrumentation. But overall, the capability it's still dramatically skewed towards the feature-rich boxes but we want to lead the way of bringing high performance instruments over. As far as the size, we've seen good growth and very good traction. The number compared to a $3 billion business is small, but we're encouraged with our progress and the growth we've seen.
William P. Sullivan
We don't want to steal the thunder from Guy, he'll show you the growth graph in this presentation.
Derik De Bruin - BofA Merrill Lynch, Research Division
Derik De Bruin from Bank of America. So 3 quick questions. One, as you've changed some of the variable comp [ph] it's been a couple of years, have you had any problems with employee retention, that's one. Number two, in your sort of 2014 to 2016 outlook, what's implied for the share count and the dividend? And also in that model, what do you think is the incremental from new products? How much organic revenue growth is going to be driven by new products over that time? Either things that are being has been introduced this year or over that time period?
William P. Sullivan
Ron, you answer the third, I'll answer the first one. The employee turnover and again, people had asked me this in terms of the impact of our variable pay, our turnover is half what the industry rate is in every region in the world. We still try to create the best environment for scientists and researchers and marketers and salespeople. And usually, we have an employee that stays with us at least through the 3 or 4 years we have them for life and of course some example of that, but we do not have turnover. Our ability to hire people we’re still in the 90% acceptance rate. Obviously, for an experienced person, if you give them an offer, you pretty much know they're going to accept the job. We also have a 90% acceptance rate out of college. And so again, we are able to attract the very best out of the top universities around the world and again, a very attractive place to work.
Yes. And then regarding the second question then the share count. So after we put our $500 million to use this fiscal year and share count that we have to -- goes down to like 347 million and that's about 349 million average for the year. For ease of modeling, I basically assume and try to do these kind of buyback programs. So the same 349 million shares throughout the 3-year period. And I didn't make any assumption of dividends. The only thing is because, it's obviously only the P&L piece. But as we grow our cash flow, this year, $1.2 billion, $1.25 billion, free cash flow being over $1 billion, our intention is all the cash that is generated in the U.S. either directly or indirectly will be distributed one way or another. And we'll see if there's opportunity to bring back cash tax effectively going forward. We've pretty much done most of what we could do in terms of bringing back cash. The last time I was here, I indicated that we had plans to bring back $500 million in November, which we did, which is going to be used this year to buy back shares. I have no such plan going forward, the opportunity might arise and I'm still hopeful that at some point in time, tax regime will change and we don't have that limitation, but that's not in the plan.
Ronald S. Nersesian
The organic growth question?
William P. Sullivan
I think the third question is about organic growth.
Derik De Bruin - BofA Merrill Lynch, Research Division
Ronald S. Nersesian
We have a stream of new products that are out. I'm not sure, Derik, I have your explicit questions. You want to/know whether or not...
Ronald S. Nersesian
There's a significant portion. I don't have the exact number right now. I'll follow-up with you later.
Two other questions. It's Bill Cross [ph], [indiscernible]. Two other questions from Slide 17. One is why did you choose to make the third column the high end? Obviously, the norm would be to use the midpoint. And second, can you just give us again, the GDP, global GDP growth assumptions by period? I think you spoke of a 3.8% to 4% global GDP growth for 2013, but it would seem that you got a pretty steep ramp from flat growth to -- on the low end, 4%, and that would be helpful to show us by year what you're assuming for your [ph] global GDP growth?
So on the last question -- on the -- well, on the first question, why did we choose to present internal projections and that's a very fair question. And it's very, very -- I think we stated a few times that the high end of our guidance is usually -- our internal -- it's never higher obviously than our internal projections. Sometimes, it might be lower, but it is of course more or less [ph] internal projections. So we've -- because we've been known at times to make internal projections that sometimes miss the mark, we cannot reasonably guide midrange to that -- those internal projections. But all our P&L projections for all our 35 product lines because we do have rolling P&L projections for our 35 product lines are done based on our internal projections. But for me, it makes -- it's much a simple base to utilize to make up that slide than if I have to have a second set of book and a third set of book, a set of books corresponding to internal projections and I have gazillions of data and then make up a set of books -- midrange set of books for low end. So the internal projection doesn't make -- it's not a commitment. We have sometimes way exceeded those, sometimes, we've missed the mark. That's why we provide a range that is more conservative. But is really the more -- I mean, I have a lot more information to build on it in order to provide those projections if I go with the internal set of projections. And then regarding the GDP, again, we've had 2 years of both incredible headwinds on the GDP front and, obviously, implication is that we're about flattish. At some point in time, you would expect under any kind of scenario some kind of reversal to the mean. Right now, the world GDP is about 2.8% of growth. So it's supposed to go to 2.9%, I think, in Q1, 2.8% with Q4, going to 3.8% supposedly as of the end of this fiscal year. And most of you, all your economies in house are in agreement, this is a consensus estimate. So obviously, if that happens, we would easily beat the low end of our -- the downside scenario because that's 4% GDP growth, especially with our significant presence in emerging markets, which are going to be growth of our -- they'll come at ease, would easily beat that downside scenario. So in the downside scenario, I'm not assuming this, but in the base scenario, about 4%, and again, reaching 4% already on average of fiscal year -- in 2014.
The 3.8% to 4% is a '14 -- the 3.8% to 4% is a '14 number?
Oh no, '13 is 3.3%, something like that, yes, I think, 3.3%.
William P. Sullivan
I always joke with Didier. Agilent, since 2005, with the worst recession since the depression, has grown 7% compounded growth rate. We've never had a 7% growth here. It's always a capital equipment, right? So again, I think if you look at it, if in fact the economy slips the other way by not much, capital equipment companies have a much higher growth rate. I mean that's what it means. I mean it's -- and the data is overwhelming for decades that, that in fact will be the case.
So your '13 global GDP guidance is for a modest, like, 50-basis-point improvement from the current global GDP level. And then you're thinking another 50 or so for '14. That's enough to move you into the 4% core growth or the 7%?
Into the 7%?
If we go to 4% GDP growth, that's 7%.
Okay. And I'm assuming that the same holds true for each of the 3 years after that?
Yes, I've maintained it flat at about 4% for the coming years, yes. And the same holds true, yes.
William P. Sullivan
Well, thank you all very, very much. We're going to take a break and get the Presidents up. And again, we'll have lots more time on questions, but they will tell -- convince you why we're going to get back to above market organic growth rate. Thank you. So we're going to start sharp at 10 o' clock.
Hello. Did I frighten you? If you could all take your seats, we'd like to get started. Sorry about that, really. If we were at the theater, we'd be dimming the lights, I think. Okay. I'd like to thank you all for making sure Didier and Bill and Ron had plenty of questions. I was a little worried that maybe we'd have some time that was not used, so I'm really thankful that all of you had plenty of questions for them. All right, I'd like to introduce Lars Holmkvist, who is our Group President and responsible for our Diagnostics and Genomics business. Lars?
Thank you, Alicia, and good morning to all of you. I'd like to just briefly give you a few words about myself. I've been with Dako since 2009. So I came on board to Agilent as part of the acquisition last year, and I was offered and accepted the position as the head of the new formed group DGG at the back half of 2012. And since then, we had been busy at work at integrating the 2 businesses.
And I'd like to kind of spend some time framing in the businesses that we are in and also talking to you about some of the revenue growth drivers and opportunities that I see in this market. It's an exciting market. We value this as basically $7 billion, some of that being immediately related to our core of the 2 businesses, some of that being more adjacent, but basically that's the space where we operate.
Organic growth rate, that's somewhere between 8% and 10% over a longer period of time. It's cyclical, obviously. Maybe the research space, the genomics business might be impacted, but over time, you'll see this is a very robust and healthy business for the 2 operations. In terms of the market positions for the 2 areas, I will characterize the Dako entry anatomical pathology part as having a solid position. Number two, if you look at the number of samples and tests through a slide passing through the labs around the world, I will probably characterize that Dako keeps a good 30% of the volume out there.
We typically play in the consumable rich area of advance staining, so immunohistochemistry, special staining, in situ hybridization are the core and key focus areas where we are playing. We're actually doing, I think, a pretty decent job. After having few years of sluggish growth rate, we reported for Dako a good 6% revenue growth last year. And given the product portfolio that we are now bringing to the market, I do expect that to increase as we move forward.
I think it's fair to say that our GSP business is emerging. I mean it's rich in technologies and obviously has a good 70% of our business there in the academia and the research area. Having said that, a number of these technologies may lead to the FISH probes, the arrays, and parts of the sequencing will be moving towards the clinic, and we see this as a terrific growth prospect for the 2 organizations. Obviously, technologies from Genomics being leveraged through the Dako channel. And if we get that together, I think we see a terrific growth opportunities for the business.
In terms of the revenue in 2012, we had a 4-month period of Dako, so it's kind of a broken here, but slightly above $400 million. The budget for 2013 full year is basically sub-$700 million I think as Ron alluded to before.
Operating margins last year is 16%, and this is still obviously, below the average of the company. I do think that, looking at the modeling for what we have going forward, we have a good shot at actually getting to the company return of 20% somewhere between 15% and 16%. I think the model depends on how fast we can drive shares with the new automated stainer in Dako. That's going to be fundamentally a key thing. The second growth driver will be how do we drive share on the SureFISH probes in such a generic space as well as in pathology.
So I think the model in my book, if I look at that going forward, we can actually probably beat that if we are lucky and we drive a lot of new placement of the new Omnis that we call the product from Dako. Our business is spread between Americas and Europe. We are underrepresented in APAC, and that's one of the reasons why the team graciously allowed Dako to invest incrementally in terms of headcount. We are opting the commercial structure in APAC with around 50 people effectively in 2013. We do that organically, but we are also acquiring indirect channels so we can record more the direct revenue going forward.
Our business is very healthy in the area. I would say that we are outgrowing, maybe not all competitors, but we are certainly on par with the marketers, perhaps in some countries even better. So this is a great growth prospect. In the old Dako days, we only had energy to do maybe 1 deal or 2 deals at the maximum. Now we can leverage the infrastructure with Agilent, and actually move faster and much, much rapidly than we could in the past. So it's looking good in terms of turning business into more of a direct operation for us.
Markets are healthy. They are exciting. They are growing. And in terms of the AP labs, obviously, increasing population in aging population, the habits and the way we eat and drink and smoke is helping to fund the growth of the cancer cases out there. Obviously, new understanding of the cancer, finding pathways and how to treat the new modalities is driving obviously a price in the market which we have seen being pretty hefty and healthy over the last couple of weeks or years.
Companion diagnostics is an area, which is very important or growing in importance. We believe that, that market is growing up towards the $300 million business, which is obviously R&D revenue as well as product sales coming out of the deeds. Dako has taken a stronghold in that market, and that's something we are going to manifest even further going forward with the channel now coming with the GC.
Molecular Diagnostics, obviously, in my book is an emerging area. And when I say that from the perspective of the clinical channel mainly despite the genetics space, as well as the AP lab, offers a terrific opportunity for further penetration. Ease-of-use, rapid detection, good price and so forth. So if we adjust to the basic stuff right, I think we will have a great, great prospect for growth in that clinical channel over the next 4, 5 years.
It's not all about patients. It's not about arrays. It also sequencing, but it's going to be the combination of these 3 modalities that's going to make a big difference, and it's all going to be incremental to what Dako have seen in the past.
Research space. I think the beauty of DGG is that we obviously play in the clinical continuum. I mean things that starts in research will find its way to being validated in the clinical channel over time, and this is where the Dako organization will take care of that. So it's very important that we are there. It's a volatile market by definition. There would be funding programs certain years. It's not -- it's a very important area that we do intend to preserve or play into. And here is a slide that tells you that we had a pretty good week at Dako, I would say a couple of weeks since we announced a number of new products coming to the channel.
And during this week on Monday, the USCAP, which is the biggest pathology congress in the world, so the Americas and the Canadian pathology congress in Baltimore, we announced a new, call it, stainer, a fully automated stainer that we call the Dako Omnis. So we have been hard at work at this new technology at Dako for the last 3.5 years, and I'm exceedingly pleased to tell you that the feedback from this Congress basically beats our own expectations. This is a box that the market has been waiting for a long time, and I'm sure you're going to ask me about how do we win against competition? What's the features? And what's the differences?
There are a number of things that are actually different compared to what is out there from competition. It's very easy to use. I mean, the software is very appealing. You can get an untrained user up to speed in the course of basically 15 minutes, which is unheard of in this space before. It carries a true continuous loading, which offers a workflow advantage, so you can run a number of slides in a panel fashion, and the throughput of the Omnis is actually very, very compelling to what is out there.
And the capacity, just to give you a few of the benchmarks that are coming to the table, the time to defer size c slides is around 2 hours. And you compare that to what is the industry benchmark there, which is kind of 3 hours. So the time for the first issue cells is basically 3 hours and 15 minutes, and you compare that to competition would basically [indiscernible] somewhere between 14 to 16 hours. Cable capacity and throughputs on 8 hours for Omnis would be up towards 120 units of chemistry slides. And also, 30 e slides.
And you compare that to the benchmark of the industry, I would basically say that we're 50% higher or even more. 24-hour capacity will be up for -- it's going to be 80 slides IC and 45 slides for ISH. So parameter after parameter, we will basically be able to compete very, very aggressively with installed base and what companies is out there are bringing to the table. And you picture the situation Dako is coming from where we -- we're underpenetrated in the large lab, that carries a lot of ISH. Now we've come to the table and basically hit that right on the capacity, the combination of units, the chemistry and ease -- easy-to-use. So in my book, we are really poised and geared yet bring share to the market. At the same time, we will continue for a while with the second platform, which is kind of more of an open system, which is a bit more manual, but we place in smaller labs when they do size hospice out there.
We had a strategy of bringing content to the box. So how do we drive more recurring revenue? We get the box in, make sure that you then innovate and bring content to that. We had identified 8 ways of new, in some cases, proprietary technologies and markers that we're either developing, buying or licensing that is coming between 2012 and 2015. So this is one way for us to get the box in and drive value and make sure that you anchor the account for a longer period of time.
We have 2 SureFISH now access to 450 probes, and this is a new world at Dako coming. And from FISH and the old back situation, we can now print [indiscernible] the portfolio, which is very compelling, very specific with a great, great symbol. We just need to optimize that now on the tissue, and we're going to be very, very competitive. We have the largest array of special stains. We have a fully automated system launched 18 months ago. We have 30 kits. We are driving share and gaining share in the market. We've just grown probably 5% to 6%. And the same goes for the Coverstainer, which is an 18-month [ph] old H&E stainer, large volume of slides, growth tech maybe 2% to 3% to 4%, and we currently see growth rate here also substantially above the market.
So in any event, I would say testing in terms of how many gain share from what we have today. Well, in areas, where we have moved in, new instrumentation like special staining, like the H&E staining, Dako is substantially outgrowing the market. And I believe the same is going to happen with the new automated ISH stainer.
Few other things is around the algorithm for digital pathology. We have invested not to play today with a scanner, but we have algorithms are being introduced in the market for scanner companies. We had 2 strategic collaborations, one with Philips and one with Omnis that we start to see hitting the market hopefully in the next 3 to 6 months. And we had a very cool way of integrating all our basically staining machines into a software that drives it overall called a Dako LINK that locks into the hospitals or the account's LIS system.
So in terms of connectivity, Dako is probably leading the pack right there. And the last one that's going to be introduced in the next couple of months is a unique, a new tracking tool that basically tracks the sample all the way in from the entry point to the exit points. So it's a long way to basically give a QA to the accounts out there.
So it's a really busy time at Dako. And now we see the impact of the last, I would say, 24 months of very focused attention and high spending in R&D to get the products out there. In terms of 2 products that I'd like to bring to your attention, which are very important. The SureFISH, we have been very impressed by the signal and the speed, the way that the Agilent basically prints the articles and get FISH to the market.
Launched in early 2012 with some cancer probes coming in late 2012, we now have 450 probes out there pushed mainly through the GIO organization. We have 180 customers. We have a good repeat buy. We have not yet anchored a bigger cytogenetic labs. It's going to take us a bit more time to get there, we need to work more deeper, spend more application resources to basically train the account and validate the business. It's not yet sold the probes in there. So in my book, we are making the right stuff, but it's going a little bit behind plan. And what we need to accelerate there is obviously to fix the performance on SureFISH on tissues in the cancer space. We need to optimize it. We know it's going to work.
The question is do we optimize the protocol, or do we have to slightly as we design the probe to get it to work, but this is the #1 priority for us right now, to optimize this and make sure this works in both the AP lab, as well as in this cytogenetic lab. IQFISH is the proprietary technology of FISH where we can have the hybridization done in 2 hours instead of the standard time of 16 to 18 hours. Launched in Europe in 2012, good traction going 50% about the baseline market where we have launched it and introduced it.
Good news, U.S. opens up right now. The reason we got the FDA approval, and we'll be introducing it and shipping it to the U.S. accounts in the next 2 weeks, and I believe this is going to keep a lot of attention to the markets, and I'm very excited about the prospects here. Obviously, the fast buffer when optimized on tissue will be something that we introduce on all the probes out there. So it's a really key technology differentiator compatible to the market is out having. Two full areas for Genomics, but is actually going to render a lot of I think not only attention, but also opportunities for us. So a lot of questions in our play in sequencing.
We are a sample press and we are informatics from a back-end type of company doing a great business with our target enrichment. SureSelect was the first one. HaloPlex came in as a good response to what's the move from the academia into the clinic, and we are now, I think, running a good business. We see hefty volume increases a bit offset by pricing. But over time, if we believe that sequencing moves into the clinic, and we do believe sequencing will be in the cyto lab, in the AP lab, we got to control move of the workflow.
So the team is now busy working at, looking at the options to be outsourced, to be in-sourced, what's the type of combination that we need to put on the table in order to manifest our play in the clinical environment, where the validation of the workflow is going to be very important. So we are hard at work, and hopefully, we're going to be able to give you some news as we move forward with our updates of the business.
Microarrays, a great business for us, #1. And moving also into the cycle space, and clearly a couple of growth drivers we see and call it an application expansion going into the prenatal, postnatal and IVF testing. So obviously the market is expanding. We see geographical expansion. The APAC markets obviously are poised for further growth, and we see this also an opportunity to bring to a, call it, a medium-sized [indiscernible], the larger cytogenetic labs. It's going to be a lot about workflow. We're going to see -- we can automate that. We're going to see -- we can apply some of the faster technologies to actually get the results faster, and this is obviously the combination of what Dako brings to the table.
Regulatory channel, it's clear that we got to go down the route of validation. We have started the, call it, the FDA journey with the clinical trial to make sure that we have a validated [indiscernible] array system. At the end of the day, we got the medical device status of our scanner in Europe and in Asia, and we expect that, that is going to continue obviously the throughout the world. In terms of the FDA status validation, we believe we've got to be in a position to submit by the end of the calendar year '13, and that's going to come into impact and play somewhere in 2014.
PharmDx, a fantastic opportunity. We are doing the right stuff. We are making sure that the patients are getting the right treatment, so Dako is making a big difference in this regard. And a large number of the treatments are ineffective today. So more than 3 quarters of the treatment, very aggressive treatments, are rendered without impact, with significant side effects and obviously cost to society. Dako has made, I will say, 4, 5 key strategic partnerships during the last 18 months, some of them being in-house in the last couple of days, where we had clearly demonstrated, in terms of the top tier Pharma and very, very noble and promising compound, that Dako is a major player in this field. Basically, this is accretive to our income from day 1.
We book revenue and make sure that we deliver those, but the long-term prospects of getting the kit out there or the assay out there is actually the driver for our business. So we're going to continue to firm up more partnership, sustain in terms of the impact of our business. Again, long term, we have that to drive the sale of the kit to the market, again, constant on the machine.
So how do we wrap it up and how do we win? Clearly, the next 24 months is going to be of prime importance for the Dako channel. It's going to be about launching the Dako Omnis, making sure that we get the increment, making sure that we get the ISH, so we get the higher price point, and that's going to drive, we believe, a significant amount of the incremental share for Dako, drive growth in Asia, in China, in Korea and a few other countries that we are on the way to attack right now, continue to invest in R&D. Although Dako is at its peak, I still see Dako running at the level of maybe 12% to 13% in a sustainable fashion and the same is probably going to be true also for the GSP business.
We've got to leverage Agilent's capabilities whether that is in logistics, manufacturing, infrastructure and IT, things that the small Dako in the past had no way to fund and do. So being part of the Agilent family just will enable us to drive growth in our business and that's a terrific opportunity. And obviously, at the end of the day, we're going to leverage the regulatory channel and capabilities that Dako provides, not only for Dako, but also to drive validation for the new products into the clinical space. So with that in mind, thank you very much. And I'm just going to ask Mike to come.
Michael R. McMullen
Thanks, Lars, and it's a real pleasure to be here today. What I'd like to do today is start with an overview of Agilent in the Chemical Analysis space. Then I'm going to turn to Varian, give an update on what's been going on with Varian, what did we gain from Varian. I know about some interest to a number of you in this room. And the focus on my comment today are really going to be about the CAG growth and profit expansion story inclusive of the 4 former Varian businesses, where we believe our focus and technological leadership, continued geographic expansion, with our funding model and gross margins allows us the best in growth, all building a foundation of superior customer satisfaction will give us those growth rates stability referenced earlier in his comments.
So this is a reminder. Agilent and the Chemical Analysis business, Agilent is the recognized leader in the space across the food, environmental forensics and chemical energy space. Now despite some recent short-term challenges in certain market segments, these markets have great long-term growth potential. You heard earlier, Ron's reference to these global mega trends. He talked about the growth in energy, for example, which you know is centered in emerging markets as well as sources for new sources of energy. Now think about the global food supply, what kind of new challenge that presents? Perhaps, some of you had fruit this morning here for breakfast at the start of the meeting. Most likely, that was imported.
Well, how about the pesticide level on that, is it okay? Or if you're a lover of fish, you may have had red snapper last night for dinner, but do you know if it's counterfeit or not. A recent study in the U.S. showed that 95% of what's sold in the U.S. as red snapper actually is some other food. New environmental contaminants. We talked earlier about the emergence of -- the recognition of these personal care products in our water system. Do you know, in the U.S., doctors are allowed to prescribe over 3,000 prescription drugs. You know there's elements of that in our water supply, what are the human health consequences of those. All these trends create testing opportunities for Agilent to provide testing solutions to our customers.
Agilent has a history in Chemical Analysis business of outgrowing the market, delivering profitability well above 20% and as you'll see during my presentation, that's what we're going after in the next 3 years as well.
I think it was about 3 years ago in this exact venue I first talked to you about the Varian acquisition. Now I must say that within Agilent, we really don't use the word Varian, and this happened 3 years ago. Since then, we brought in 3,000 employees, thousands of customers, $800 million of revenue, move them all into our system, so they're integrated, they're part of Agilent. But I think as we come up on our 3-year anniversary of the acquisition, really a good time to reflect on what actually has happened and how it has contributed to the overall results you've seen from Agilent. First of all, we talked a lot about cost synergy, which I will get to, but growth. With the acquisition of Varian, we expanded our portfolio, we have a much broader technology offering to our customers in our core markets. We also dramatically expanded our installed base, and as Bill mentioned in his comments earlier, increasing opportunities for us in the sales of services and consumables into the expanded install base.
And then finally, market reach. Agilent has a very strong global presence, but in some countries, Varian actually was stronger than Agilent, and also they run certain segments, such as the mining minerals space, that we really didn't have much of a presence. So we really expanded our addressable market via the Varian acquisition, and they have -- it's actually contributed to levels of growth at a healthy overall results of the business.
On the customer side, we've improved the customer satisfaction and experience here. You may recall in my comments at the last earnings call, I talked about in the environmental space, we have the broadest set of solution for our customers. That's what we got with the acquisition of Varian. We were able to provide a much more complete set of solutions to our customers. And by the way, with more feet on the street in terms of sales and support, we're able to give them much more of a superior customer service experience.
Then finally, returns. The acquisition at the time was the largest in Agilent's history, $1.5 billion. It has made a significant contribution to the overall level of profitability to the company. We've been able to contribute to that record level of profitability that Didier referred to in 2012. We're well on our way to hitting the $100 million in annual cost synergies.
And for those who like to look at historical trends, we continue to drive the profitability of the CAG business back in terms of margin improvement, and you will see by the year 2016, we're back to where we were prior to the Varian acquisition. So again, we bought it at the right time. We paid the right price and has delivered considerable value to Agilent company-wide, so very pleased with the contribution to date and the story is not over.
So spectroscopy, as we define it, is a $1 billion market opportunity. Agilent is not yet the leader in this space. The Varian acquisition really gave us a meaningful presence in this business -- in this market space to complement already existing products we had to offer to our customers in Spectroscopy.
What we're doing now is we're applying our organic growth model to these new technologies. We invest more than our competition in this area, driving a technological leadership focus. And it's all about being market to first with novel technology that really create differentiated value for the customer. And let me just highlight a few of those for you. For example, out of our Melbourne team, the 4100 MP-AES, we call it -- it's a project that runs on air.
So those who are familiar with atomic spectroscopy. This is probably the first revolution in decades in this space. It eliminates, completely, the need to have dangerous and expensive gases in the customer's lab. Just up recently, there was a customer in Canada that says, "Hey Mike, in addition to the safety improvements and obviously the performance I gave with this instrument, I can pay for this thing in gas savings alone in less than 1 year." So real high value proposition for the customer.
How about the handheld FTIR business we have, the FlexScan product, which allows us to address some of the outer lab applications that Ron referred to earlier. From selling products to the BMW plant in South Carolina, where they confirmed that the metal -- the metal is ready to accept paint, so we don't have any issues with the paint, or there's new application that we're haven't even dreamed of, for example, those who are familiar with bird's nest. Bird's nest is a substance that's more valuable than platinum. So it's a really -- a delicacy, particularly in Asia, counterfeiting is rampant. With our FTIR product, customers are buying us now to ensure that their products have not been tampered with and they really are paying with what they think they're getting.
So again, it's a set of applications we haven't even dreamed of what went down this space. To the ICP-QQQ, first in its own category, it'll do high-end residual -- I mean, the high-end, the high sensitivity research work, particularly in the Life Sciences space.
Okay. It's easier for me to sit in front of you here as the General Manager of the business, crowing and telling you about all these wonderful products we've been bringing to market and talk about growth rates and such. But the external world has seen us as a credible player in this space as well.
On the right-hand side, you see for example the MP-AES was the winner of the R&D 100. The ICP-QQQ was the show of the year at ASMS, and those that are familiar with the show, there's a lot of new products coming out, a lot of investment in this space and to win this type of honor at that type of venue is really -- says something about our credibility in this space. So a $1 billion market, and we're all about growing share.
By our calculations, internally, we believe we grew about 2x the market in 2012.But it's not just about the new businesses that are coming into Agilent. Gas phase analysis, you've heard them referred to earlier as Gas Chromatography. That's the franchise business of the Chemical Analysis business. We are the clear market leader, market share probably 2x, the #2 share player in this space. Installed units, well over 250,000, but we're not content on resting on our laurels or our history.
We continue to invest very heavily to drive innovation and improvements for our customers. We're the recognized leader in this space. We have the broadest portfolio in this space, and we continue to improve that lineup of new products. For example, you look here on this slide, you'll see the 7200 GC QTOF. I like to refer to it as the ultimate answering machine.
If you want to know what's in a particular chemical substance, time-of-flight technology is the way to go. But just recently, with a collaborator last week in San Francisco, Agilent held its Agilent Technologies Conference last week in San Francisco. I was talking to one of our collaborators about his work in Asia, specifically in Vietnam, and you may know that in Vietnam, they have a very vibrant shrimp export business. Well, at the end of 2011, early 2012, 100% of all the shrimp in all the ponds died, no idea. So obviously, big economic consequence, there's livelihood questions about this.
So what to do? What's going on, is it -- is pollution coming down the river from some of the countries up to the other end of the Mekong River. So what happened? The ministry in Vietnam packaged up the shrimp and sent it to our collaborator in the U.S., using the Agilent GC QTOF, we were able to rule out what it wasn't and what it was.
So again, this shows you the power of the new technology we're bringing to the market. And as I mentioned to you, in the earnings call last month, we're bringing to market this quarter replacements for our flagship high-end lab GC, the 7890B, is our new product and the 5977 GC/MS, which is -- in the GC/MS area, this is really important because this is our first introduction of this platform in the space for almost 7 years. So we're the recognized leader in the space and we're bringing new offerings to the market.
And like my story on the shrimp, let me tell you one more story here, which is why there's such a compelling -- one example of ours is a compelling value proposition for these products. I think we all know in the world -- the supply of helium is fixed, and the fact that there tend to be global shortages for it. Many of our customers are being requested by their senior leaders to find a different way to run their laboratory operations. Helium is a key element of Gas Chromatograph in terms of being able to do the analysis. With the product we just introduced, we have a switching capability, which allows us to move between helium and nitrogen.
Why is that so important? Because only the certain set of applications actually require the helium and often you just need to have nitrogen going through your system. This is a huge benefit for our customers. Great value proposition for Agilent. And just to give you some indication of response, we held a webinar last week to talk about this product with our customers. It was sold out because there were 1,000 customers dialed in and really couldn't handle anymore.
So I think it really, again, reinforces the value that we're trying to bring to the marketplace. So again, a leader in this space, investing to continue to differentiate ourselves versus the competition.
So I've been talking about technological leadership and focus in what I would call the boxes, Spectroscopy, Gas Chromatography, but as you know, there's more to this business and you know there's more to the customer relationship than their experiences with instrumentation. And on a day-to-day basis, through the interface with the Agilent services organization and our consumables, we have become indispensable in the lab to our customers.
We're in there every day, having a conversations, understanding their needs and really building this trusted relationship that is a key mark of their experience with Agilent. But it's not only a key element of the customer experience, it's also a key growth opportunity. We talked earlier about the need and drive from management to have more reoccurring revenue.
Right now, Agilent services and consumables business over $1 billion share between myself and Nick, and via the Varian acquisition, we got a much broader expanded installed base to go after. They were underpenetrated in services, so that's been a way for us to drive more growth in this space. We also, at this conference last year, launched a new initiative, which we call CrossLab, and this is all about going after the -- really, if you will, own a greater portion of the lab. So not only are we able to take care about the Agilent customers, but if you have equipment from other vendors, we are able to not only service that equipment, but also provide a line of trust at consumables as well. So one-stop shopping for those customers.
But what's novel about the Agilent approach is we also provide business consulting lab productivity services to these customers. So they're looking for more effective ways for themselves to run their laboratory operations and they're coming to Agilent. A number of large biopharma companies have placed their trust in us, and we're taking care of laboratories across many parts of the world with thousands of instruments.
By the way, this technology leadership story I've been telling you around the instrumentation, it also applies to our focus in chemistries as well. So whether it be the LC columns and our leading floor-shelled technology, some of our new bio columns, or most recently, the introduction of our new Gas Chromatograph has proprietary technologies to create alertness in the system. So why is that important? Because today, we're looking for particles that are such a low level that often your own system can contaminate and create issues for your customers. So we are at the end of our team that which again came us from Varian. We have novel technology to drive differentiation.
So as I close, we all know that winning the market is all about differentiating yourself from the competitors. So what is it about Agilent that makes us different from the other people that you talk to? What is it about Agilent? There are some clear differentiations in my mind. We have, in the Chemical Analysis space, we have the largest installed base, it's large and it's a growing install base. We have a very significant presence in the emerging markets.
And as you heard from Didier and Ron and Bill this morning, while we're looking to reduce certain level of spend and such as travel and were not backing off our investments in the geographies where we think the growth prospects are great. We continue to do hire, we continue to focus on specific college recruiting programs, so we're continuing to invest in these emerging markets.
Superior performer, with an investment strategy to match. So it's one thing to stand in front of you and talk about we're going to have all these great new products and -- the competition, we stand behind with an investment strategy to match investing more in our peers. But we have a way to pay for it. We have, in front of us, over the next several years, we have continued transformation of the portfolio, which not only will drive growth, but increase margins. And the supply chain transformation you hear later on from Soon Chai, that gives us the money to invest in growth, while at the same point in time, fighting for levels in the business.
We talked earlier about the continued and the strategic presence we have at a lab, a key product of what we're doing with our CrossLab program. Outside surveys recognize Agilent as providing the industry best customer experience, and we have no intent of moving away from that. So in summary, the Chemical Analysis business building and expanding from division of strength in what we believe to be attractive end user markets. So with that, I'll turn it over to my colleague, Nick.
Nicolas H. Roelofs
Thanks, Mike. And thanks, everybody, for the opportunity to talk to you today about the Life Sciences business at Agilent. I want to give you a perspective, as I take a little bit deeper dive of what this business is like and the journey we're on and the place we're going, where we're headed currently.
If I take a look at the overall market, $21 billion is the way we size the market for the group. This is the largest market for Agilent, and we're very excited about this market because we think the fundamentals are incredibly strong. This is a story about our customer base really dealing with the human condition, whether it's at the research end or whether it's at the therapeutic end, and it's something that we're very convinced we'll have a very long cycle, sustainable growth. So we see this business in a market that's going to have a 4% to 5% forward growth, current softness in areas around academic, are out there. They're real, they make the numbers in '13 look, as Didier told you, but along cycle, we're very convinced that this is a great market to be in.
Now let's look at our accomplishments against this market. We ended the year at a $1.6 billion business. So while we have some technology leadership, we believe we are #1 in LC instrumentation. We are still -- a lot of opportunity to gain in ground in terms of other products, #3 in mass spectrometry. This is one of the fastest-growing technology markets in the entire analytical and life science marketplace and we've been moving up in share very strongly over time.
We're very proud of that #3 position; #2 in NMR, it's a 2-player market for all intents and purposes, so it's easy to say #2, and I'm actually going to spend some time today giving you a deep dive visibility on the NMR situation against sort of the 3-year update of Varian and where we are with this business, and I will have a slide in detail on that. But overall, if I look at this market, what I'm really proud of is to show you that the positions we think we have in Pharma Biotech are #3 and perhaps more important, we think we are now #4 in the academic sector. And that required us to put a tremendous amount of investment into this business in order to attack that sector. We think we've accomplished a lot, and we still have a lot to do, because as I said, in most cases, we're not a very, very large player in this space.
Finally, Ron mentioned operating profit. This business must be above 20%. There's just no reason why it shouldn't. We've had a great journey with our core products to bring that operating margin up. And as you can see from this slide and the comments that Didier and Ron made, our overall business is about 19% without the NMR portfolio. The NMR portfolio is a work in progress. Final comment on this slide, I am still personally firmly convinced that this market will be dominated by Asia Pacific, and I had predicted that we would see our Asia Pacific business be the majority of this business by this year.
We've been delighted with significant growth in the Americas, but we still see Asia Pacific as the region that will drive going forward and is going to become the largest reason for this business over time. So let's take a look at the macro trends that are underneath this business. There's a technology upgrade cycle across multiple platforms and it's really driving us. I'm going to tell you a story through the rest of the slide that's mostly about our investment in growth, and this life science group, as defined today, has been primarily organic growth.
Growth through R&D investment has really driven what you see as the life science group today. And that growth has been investment in R&D and technology leadership. And so we are very well positioned in these technology upgrade cycles. As an example, in LC, we are the #1 player today, we believe, in UHPLC units, and we're very well positioned in that subsegment of the LC market, which is growing double digit, even though the overall LC market is growing low single digit. So we're positioned with technology to win in share.
Underneath the other macro trends, pharmaceuticals, we've all been talking about new biologic entities. This is moving and continues to move and our portfolio drives testing around biosimilars, as well as the pathway testing and pathway elucidation that creates new drug targets in academics and in the pharma research. There's significant opportunity in the relocation around the world, we talked about this quite a bit, and we're investing in that academic base and continue to do so, so that we can penetrate the thought leaders in academics as they define new drug targets as well as other opportunities.
Greenfields is really what will be the long cycle driver for the life science industry, and we are well positioned for 3 subsets of the Greenfields. First, clinical instrumentation, there's a real opportunity as the Mass Spectrometry technologies penetrate the clinic to participate there and this group is well positioned to stay ahead of that curve. Integrated biology interfaced between the multi-omics techniques, genomics, proteomics, epigenetics, metabolomics. This interface is driving an entire new wave of science, an entire new wave of technology.
And between our group and the DGG group, we have the portfolio to win here. And finally, sample prep, an area -- the more samples we can prepare, the better we do in that part of the work flow, the more feed that goes into the detector side, and we are a chromatography and detector strong player with our heavy instrumentation portfolio. So overall, we think we're in a great shape, even in an uncertain market to move forward quite strongly with the fundamentals.
So let me take a look at where we've engineered the P&L and how we've managed through the process over the past few years to really drive the investment and move forward. We've had heavy investment in R&D. We've done that unashamedly with high percentages relative to our peers with the goal of investing as many dollars as the #1 player to become the #1 player, and that's returned outpacing growth, 13% compound annual growth rate for the group in the period of '06 to '12. That R&D investment hasn't been foolish, as I said. We tried to spend as much or more than the peers.
The overall growth has allowed us to absorb R&D percentage. And while we've kept the dollar amount up, we're starting to get significant returns on the P&L as a percentage of R&D is going down relative to top line, and this is appearing on the bottom line, fixing that problem that we have in terms of operating profit and moving well above the 20% line over the cycle that we talked about. During the period, we obviously grew our operating profit significantly faster than the profit that we saw -- other than the growth on the top line, and at the 22% compounded annual growth rate in profit dollars.
So really, this has been that ability to have leading-edge technology, drive very high price, very high gross margin and return that to the bottom line, as well as fuel that R&D investment. We created a separate life science channel, that was a significant investment. That investment is starting to pay off with leverage, and so we're starting to see real opportunity. As I said, we've moved up to what we believe to be the #4 position in academics, and we have a specialized channel that can win, that can deliver and talk workflows to our customers.
We're achieving tremendous manufacturing facilities and manufacturing efficiencies by moving operations offshore. The life science group has taken tremendous advantage of the EMG location in Penang to move a significant amount of our product portfolio there, as well as the legacy footprint in Singapore, where we now do our mass spectrometry and automation products, and we continue to leverage that supply chain through Soon Chai's organization, which he'll talk about a bit, to drive savings, which again feed the P&L both at the bottom line for that operating profit move, but also to allow us to sustain leading edge technology in R&D.
We've made small acquisitions in the group to augment our workflow with technology bolt-ons and tuck-ins that have really given us the opportunity to bring applications to market and to become seen as an application deliverer, an application developer and an application leader, which brings solutions to that customer base, and ever laser focused on solving the customers problems better than the competition, because we move beyond the point solution. And we're investing in fixing the RPD group, which I'll talk about in another slide.
As a portfolio, we also have to worry about reoccurring revenue, and software is another piece. Mike spoke about the columns, consumables and the service. I wanted to give you a preview of the software, which also expands across the CAG group. This has been an area where we've had significant growth, compound annual of 15%. It's been a strong investment. We have a service and license business here.
Our OpenLAB platform as well as our BioInformatics tools are winning in the marketplace, and we're starting to really be seen as somebody who completes the solution and participates in the ground, which is the center point of multiple instruments connected for a single point answer. We continue to move workstations into networks and this is the big opportunity. We are the largest player in chromatography workstations. That marketplace is shifting the networks and we are participating in that shift with our OpenLAB product and with new solutions.
We're bringing low-cost solutions to emerging markets. This is very critical. The emerging markets have lower needs and they're very price sensitive. If we can bring an adequate solution to the emerging market in terms of software, we can win with a portfolio of instrumentation and software that delivers ease-of-use and exactly what the customer needs at very good gross margins.
And finally, data management. We worry about certain of our markets in a lot of ways. We have compliant customers in pharma. We have customers that are developing products to go to pharma. We are feeding across with our partners in DGG, the diagnostic market, and we're bringing software that brings back compliance to the marketplace, in addition to those requirements in food and environmental testing. So this is really an area of recurring revenue that a stable under base for us in the life science group and the chemical group.
So what has all this investment brought us? We talked about having solutions. We have one of the broadest portfolio of products within the Life Science group to bring to the customer base to solve any problem. And when we combine that portfolio with products that are manufactured in the DGG group and the CAG group, we are insurmountable in our capability of delivering a workflow conversation of the customer and completing that conversation across a wide range of products. Now I'd like to take a deep dive on one of the pieces of our portfolio, the star of our organic growth story, and that deep dive is in mass spectrometry. So let me look at LCMS for you and take a look at what we've done in this business.
We made the decision in 2007 to enter this market. As Bill talked about it, it was a place early on where the R&D investment was very high, much like modular EMG. It was a place we had to play and we had to make the decision to play and put the R&D money in. What did we get in that return? And the '09 through '12 window, we have a compound annual growth rate of 14%. It's well above the market. The gross margin improvement has been phenomenal. This is a business that at one point was single-digit operating profit and mostly through gross margin leverage because of high-quality products, high technology and engineering in the manufacturing group, we have brought the operating profit well into double-digit at a place where it is going to continue to pull us up into that 20-plus percent.
We have the broadest family in the marketplace. We arguably are close to #1 in Triple Quad, which is a tremendous statement given from where we've come, and we know we have the highest sensitivity instruments in the technologies we play. And that is the investment in R&D that has brought that technology leadership. And the growth here has allowed us to absorb that R&D percentage in a way that keeps us driving, keeps us investing, keeps us winning but at a ratio of top line now that looks quite comparable to our peers and competitors.
We've also been able to leverage a significant amount of the investment in EMG. You had some questions earlier about where technology is going. You got answers. Some of these were the answers. We have RF modulation, we have A-to-D converters, we have the most accurate time of flight due to our pulser and all of those technologies came out of the EMG group. And frankly, LSG doesn't pay for much. The EMG group has developed them, we do some modifications to adopt them. That R&D comes at a very low cost to the group, leveraging the overall R&D spend of the company into a technology-winning portfolio. So we really believe we have a great product story here. And this has been an organic growth play, as is most of what is the current LSG group.
NMR. This is a place we want to give you some visibility to. It's been a challenge. We're coming up on 3 years. We told you that it would take us about 3 is to do some reengineering, to launch some technologies into this product portfolio. We've done that. We have some EMG technologies that are now into our consoles and probes. But let's look at where we are with the business. I call your attention to the graph on the lower right, and what you can see is near the top of the graph is the 0% operating profit line. So this business has been losing money, it's been an investment for us.
We've intentionally invested heavily in this business. And in that investment, we have returned some very strong positives, but it's now time to bring this business into the fold of operating breakeven towards the end of '14 and into '15, and of pulling up the overall boat and allowing us to get to those plus 20% operating margins that you saw in Didier's model as we get into '15 and '16, getting well over 20% as a group.
What have we done to date? We transferred the manufacturing out of the U.S. For all intents and purposes, the manufacturing of this product in the U.S. has moved to Penang, Malaysia, and that has given us tremendous access to the supply chain and the supplier base that Soon Chai's organization drives, as well as the cost leverage of a large-scale manufacturing site footprint sitting in Penang. This has been a huge benefit to the group. We've invested in support and service. We are curing the customer issues.
Our customer satisfaction scores in this business as we measure externally have gone from the lowest within Agilent to some of the highest within Agilent of any product line in a 2.5-year period, and that's been a heavy investment in service and a heavy investment in support, but it's paying off in the customer base. And we're repairing a long cycle of deferred, neglected maintenance and service, and we've done that now. The reputation's there. We've developed and introduced new probes with EMG technology. This is the first of the real breakthroughs.
What are our additional actions? What we've announced today and in the last 24 hours to our customer base, that we're exiting the OEM specialty magnet business. This was a business that we had within the Research Products portfolio, made super high-end magnets for the research MRI community and other elements. This business is fundamentally too custom and too volatile to really keep in the portfolio. So we have, as of today, informed our customer base that we will exit this business. It will take us time to build out. We will live up to the customer commitments to date. We will finish completing those orders, but we are taking no more orders in the business, and that helps us get back to profitability.
We're focused on routine academic customers and industrial customers. This is an area where our technologies and our manufacturing leverage can bring significant power to the portfolio. We've restructured the organization. There's been a significant restructuring over the past few months, and those are implementing now in order to really drive and assure that we see exiting '14 at a break-even trajectory. And that is the last comment. This business must help the overall group get to 20%. It cannot drive -- drag the group, and we feel that given the investments we've made in R&D, the investments we'd made in relocation and the reset of the portfolio to the current environment, we will have a good business here in the time cycle shown on this slide. So how do we win? The LSG group is about a variety of.
The biggest opportunity for us is taking share in our core markets. This looks like a pure product play. We have to have technology leadership. We are investing R&D for that technology leadership, but we have huge opportunities to take market share across the product side of the portfolio, whether it's LC, where our investment has been at the front-edge, and right now, that's the growing edge of the LC market. And so we continue to believe that we can take absolute share and we have moved into that #1 position. And we continue to believe we will stay there in terms of instrumentation and hopefully widen the gap.
Mass spec, we're continuing to move up the share ladder. We have great technologies and great products, all based on a huge operational leverage, thanks to the team under Soon Chai. And we believe we can drive strongly into that marketplace with leadership technology and utilize that gross margin advance that we continue to see and deliver, both in funding the R&D and in driving that operating profit to where it needs to be.
Deliver complete workflows for our solutions. This is really the thing that Life Science is about. So we're not ignoring the pure play of our opportunities with instrument technologies, but by putting those instrument technologies together and designing in an array of products around the workflow, we win and deliver the customer solution. Today, the world of Life Science is changing rapidly. It's going to an integrated biology world, it's going to a world of answering the question of a biologist. It's no longer the mass spectroscopist who is leveraging and driving it. It's the biologist who's pulling from the knowledge of the mass spectroscopist to utilize that tool to answer what is my pathway, what is this protein, how does it affect, what is the drug target? And that is something that we can deliver with workflows across our portfolio.
We intend to create these greenfield opportunities. We are today very far ahead in the conversation around integrated biology. We have a bioinformatics software tool that brings together multi-omics techniques in a way that the customer base has not seen before. Mike talked a bit about his webinar. We also do a lot of webinars to inform our customers and demonstrate our leadership, and we're having thousands of customers attend webinars around integrated biology. It's one of many greenfield opportunities. And finally, we continue to invest in emerging markets. We have the opportunity to teach workflows and teach protocols to the emerging market customers and participate in their investment and growth as the future goes forward. So we think we have a great business and great opportunity here, and we will deliver that over-20% operating margin. Thank you, and I will turn this over to Guy for his story.
Thank you, Nick. And it's a great pleasure to be in front of you and really speak about the Electronic Measurement Group. I can see based on all the questions you had already earlier that I will try to answer them in my presentation. But before I go there, clearly, I'd like to just remind you of EMG itself and where we are in this market. It is a $13 billion market. We are clearly the top company there, and we are the leader there in terms of revenue, $3.3 billion last year and even more importantly, probably the highest operating margin in the industry with 23%. We have leading positions in each of the market segments we address. Is it communication, industrials, computers, semiconductors or aerospace/defense.
We also have been very early in investing in emerging countries. You may know that we've been in China since 1985, and this can explain some of the revenue shift that we have, as you can see, 43% of all revenue in Asia Pacific. We grew our overall BRIC countries last year by 40% in EMG, and this is a continuous focus as we go forward. The other piece that you can notice on this slide is our lower level of exposure to Europe, as Europe is 17% of our revenue.
But speaking about customers, and by the way, they keep rating us as the highest satisfaction in all the service we're doing. We have extremely strong loyalty from these major and broad base of customers across the world. Speaking about them, there's a lot of things happening in the electronic industry, as you know, and in the end markets of our customers. So I'm going to just review a few of them here. Obviously, the major driver for Test and Measurement at this moment is what's happening in the communication industry, and mostly around the wireless ecosystem. A lot of things have been said about the proliferation of smartphones. You know that we're fast approaching probably 1 billion smartphones produced in the next few years. And also, about the growth rates, and we see some of the growth rates of the smartphone slowing down. But on the other side, there's only 10% of the smartphones that are currently LTE-enabled. That means 4G enabled. And as a Test and Measurement company, we have far more activities helping our customers develop, produce and test these devices as they go forward.
But really, when you look at this, the key driver in wireless, it's not so much the device itself. Yes, smartphones are important. Yes, tablets are important. But really, the key drivers is the amount of data that these tools provide and use across the year and over the year. Every year, the amount of mobile data is doubling. It was 70% last year, and we believe this is going to keep going on over the next years. What this means is that the industry is continuously having to invest and innovate in new formats, new ways of communicating.
Obviously, everybody has heard about LTE, but no one's speaking about the LTE-Advanced. And other technologies like carrier aggregation, are really center of what's happening currently in the R&D labs of the mobile and handset manufacturers. So this means that a test equipment provider like Agilent is constantly aligned with the new technology that get provided. Clearly, more innovation keeps coming. I was just last week in Barcelona for the Mobile World Congress. This is the major show for this industry, and a lot of new things have been announced.
One thing I wanted to mention is a new technology called Near Field Communication or NFC. This is a technology that would allow or would allow to use smartphones as credit cards, and there are many more applications around it that will come out. But the reason I mentioned this is a year ago, at the same event, they were barely a month -- there was barely a mention about NFC. So it's just to give you a feel of the amount of innovation and technology changes that are happening and that will keep happen as we go.
Last but not least, obviously, the big changes now with this amount of data over the year puts a lot of pressure on the infrastructure. As you know, we've not seen a lot of business coming from the telecom service providers and the base stations in the past year, but there's no doubt that we will need to see more investments in the overall infrastructure. 1% of the subscribers today are using 4G services over the world. But with the amount of data that I was just mentioning, we will see more and more needs there, and we will need to have, in fact, additional investment.
And what's happening is the phone, as a device itself, and the network get more and more linked in a number of new network topologies using smaller or mixed size sales in this industry, will create more a complex environment and require more tools to test and to develop. So that's where a company like ourselves, EMG, is really unique in the market, because we are able to provide solutions across the whole ecosystem from base station to handset to infrastructure with the backhaul, and we're also able to provide solutions from the R&D part of the product lifecycle in this environment, to up to the manufacturing and some in installation and maintenance.
Let me switch to another industry that obviously is front and center on many of the conversations. And it is aerospace/defense. Yes, aerospace/defense is a very critical and important industry for Test and Measurement, and we are the clear leader there. Yes, there's a lot of questions in the U.S. currently of what's going to happen and the type of investment that will happen or not. Clearly, the big question is not so much sequestration as such. It's more which products, which programs will stay on track and which programs will get cut.
Once this decision is made, it's very clear for the key players in the industry and for ourselves that we will then be able to align and provide the right solutions for these programs that will go forward. And clearly, in the U.S., I believe that the type of products that we provide that are highly technology driven will, by definition, always be needed wherever the investment will go in the future.
The other good news is, while this is happening here, there is a lot of investment and more and more happening outside of the U.S. in aerospace/defense. As you see on this slide, clearly, satellite, space. You may know that many countries try to have a solution for global positioning systems. They no longer want just to rely on the GPS system as existing. So countries like obviously, Europe with Galileo, that Russia, China, Japan, all have major programs in place to go through the satellite and manage the overall position systems going forward.
On the -- another side, I also I mentioned radar modernization. A lot of the digital world is coming into radars. This creates a whole wave of new investments, and here again, outside of the U.S., major programs in place in Europe, Russia and China. Last but not the least, in this space, it's all about surveillance. I was recently in Brazil, and they have a huge problem of just understanding who is crossing the boundaries, especially in the Amazon River, and major investment going into tracking and being able to track what's happening and to safe better the boundaries. Other example is Japan. Japan is looking at surveillance systems, especially with the situation in Korea.
So all in all, over time, we'll see that this balance between the U.S. and worldwide need for more aerospace/defense products will probably be a little bit more balanced than what we have seen in the past. For some of the other segments that we addressed, clearly, in the computer side, computing -- mobile computing is driving -- obviously, we saw the applications everybody is using. A huge need for big service, big data networks and faster back planes, faster buses, where other technologies that we have in high-speed oscilloscopes are really helping to provide, and this will keep continuing.
So on the last saying here, I also want to mention that obviously, the industrial segment is one of the important ones. There's a lot of electronics going everywhere, and we see this more and more in energy, with more investment and more capabilities and more needs for electronic components and tools in the energy sector. Health care is another one. But one of the most important one is automotive, and I think it's fair to say that the automobile is now getting to be one big smart device, and we're looking more and more this as one.
So the message here is our broad portfolio we have here at Agilent, in EMG, is really helping us and is very well suited to not only help our customers there, but make sure that we help in the innovations as they go forward and grow.
So speaking about products, clearly, our strategy is based first to address the high value, high-performance users. We do this with our benchtop instruments, feature-rich instruments, and we are clearly the leader in this field. We use clear competitive differentiation that are based on our own knowledge. And the fact that we have our IC technology in-house, we are unique in the market of having our own fab that allows us to differentiate not only the measurement experience level but also at the component level by providing exactly the right component needed. And you heard from Nick, one of the impact of this in his business. That is, obviously, true in my business and that's why we invest there.
So we're using the same -- they're what's, obviously, keeping this leadership in the high-performance sector, then we deploy these values we have into more tailored applications and obviously, more cost-conscious solutions to get reach of a broader market. Today, I'm going to speak about 2 major deployment strategies. One is about mobility and clearly, the increasing needs to get lab quality measurement in the field. And the second one is, based on the questions you had already this morning, really what I would call modularity. And this is really addressing the need for more flexible, more cost-effective or cheaper solutions, especially focused mostly in manufacturing and multi-channel applications.
But before I go there, let me first remind you that we are the leader and we have a position of strength in the industry with the major product platforms that we have. And this is even more true in the RF and microwave arena that is very high technology requesting. For instance, our electronic design automation toolset is used by over 70% of the R&D designers that do any design in RF and microwave. This is a very powerful toolset and enables us to be very close to our customers very early in the design process, to really make sure that they have what they need and we keep developing and investing to stay aligned with their need across the chain.
The second type of products that we have here, as I mentioned, is a network analyzer. Network analyzer is the core product needed to test all components in the electronic industry. We have a huge market share there. All and most of the components that we have in the industry are probably tested with one of our instruments, and obviously, a position of strength, as we have also in signal analyzers and signal sources where most of the companies that -- who design transmission devices for the telecom or for the aerospace/defense industries use our tools.
And here, obviously, we're #1 in each of them. But I would also say that we keep investing. It's very important to stay ahead in this market to secure our position. And we keep innovating to address new market positions and market solutions. The latest example here in this market, this we just introduced last month in February, a real-time spectrum analysis features and functions, and this is very unique in the marketplace.
We definitely took our competitor by surprise here, because not only did we introduce the highest performance or [indiscernible] specification of this world, but we made it available to our customers with simple, single software upgrade so they can do this now with their existing equipment. This is unheard in the industry and in fact, our competitors need a completely different hardware box to address the type of solutions. So this just one example of the continuous investment in innovation we provide to this field to secure our leadership.
There is one market that we're not #1 yet, 1 product category, and this is the oscilloscopes. Clearly, as you know, oscilloscopes is one of the largest market in Test and Measurement. It's about $1.2 billion. It is also one of the most common tools that all engineers or technician that work in electronics are used to and using to. We have, since now, over 10 years, a very clear laser-focused execution. We have a dedicated organization and division focused on making sure that we will become #1 in this product category, and we're making a huge progress.
As you can see on this slide, we now, clearly, more than double our market share in this market space. And our strategy is very controlled, frankly. It is based on capturing the high end. We have, again, this leadership technologies that we have in-house, but also added to our strong expertise in applications and in measurement, we applied this to the high-end users, and we really look for capturing the lead this high-end, high-performance, high-value segment of oscilloscopes or oscilloscope market. The best example is, we have -- we are shipping since last August the highest performance oscilloscope on the marketplace.
We really believe that this year, we will capture the leadership in these market segments. But obviously, this is not going to be enough for us to be $1 in the oscilloscope business as a whole. So the rest of the strategy is really deploy some of the technologies and make sure that we have clear differentiation as we provide tools going into the midstream and the mainstream markets.
And here, again, we look at clear differentiation, and the best example is our InfiniiVision 4000 X-series that we just introduced. We won a number of awards already. And the differentiation here is it's not only did we integrate in this oscilloscope a number of different functions to make it the tool of choice for the engineers, like protocol, or like function generators, but we use a unique capacitive touch screen that is not, so far, existing. And this means now that the users find on our oscilloscope what they have currently in the tablet and are have the same simple way of interacting with this tool that they're used to, that we're all used to using some of the more commercial tools.
Last but not least, again as we're broadening our offering in oscilloscopes, it's all about reach. We have, since the last 3 years, invested heavily in making sure that we have a very strong channel, the distribution channel. This is across the world, obviously, also in the emerging countries, and we now have the reach needed to be winning in this marketplace.
One of the other markets that I'd wanted to make sure I addressed, and we have the exact same determination to win in modulars than what I just mentioned in oscilloscopes, is the situation in modular instrumentation. Modular instrumentation is already a faster growing part of our portfolio. You heard from Bill this morning, we introduced over 75 modules that are on the market today. Frankly, by end of this quarter, we should be closer to 85 as we have a number of introductions coming. And we keep investing heavily 20% of R&D budget are for EMG to make sure that we have the right solution going forward. But our strategy also is very focused. We aim at providing solutions to our customers mostly in RF, microwave and high-speed digital. That's where we invest directly currently.
The key elements of why we will -- how we will differentiate and when we will -- why we will win in this market, the #1 thing is, we're not going there alone. The fact that we really proposing open standards in the modular format allows us to capitalize on what other companies do in partnership with them. Clearly, this company -- we just announced a major relationship with a company called ADLINK, and we providing key partnerships with them. They will provide solutions in spaces that we don't address.
The second part of our strategy is making sure that we have lab-quality measurements, and again it's about providing key performance differentiation based on the technologies that we have in-house.
The third element is really about software. This is a very critical element to understand. We've developed over the many years that we are in Test & Measurement major algorithm, and these are key to transform electrical signal into measurement insight. We will provide, and we do provide the same algorithm on any of our hardware platform. Is it modular instrumentations that we have, but also the design software that we have. And this provides a full correlation ability that is so important for our customers because our customers really need to have a full continuum of solutions, but also measurement integrity across the overall design chain that they have.
So with this, we can guarantee that a designer of a manufacturing test systems with PXI can have the same measurements and same value correlated to what has been done in the R&D development when they were using our development systems or instrumentation.
And last but not least in this market, key differentiation is -- or frankly -- in the real world, it's not going to be about just modular or just instrumentation. It is going to be about what is the right solution to serve my needs. And in this case, we call this hybrid systems, and we are unique in being able to propose to our customer a solution that integrates not only modular, but high and feature-rich instruments to provide the right solutions to our customers to serve and to solve their measurement needs.
The last topic I want to mention is this mobility segment. This is a fast moving and growing market opportunity for us. It's all about providing lab level measurement in the field. Obviously, the core applications here is in insulation maintenance. We see companies that, for instance, deploy base station needing more and more high-quality measurement as they go in the field. But we have many more applications because these products are very rugged, allow to address many more needs. And as we go forward, we discover a lot of very high-level interest in this kind of tools, and we keep developing more features in this handheld format.
So let me close here by stating clearly that not only are we committed to stay the leader in our core markets, in our core product platforms, but as you'll see, we investing directly to make sure that we become #1 in oscilloscopes. We will deliver new growth with our modular and handheld solutions, and we can do this because of our ability to not only leverage our overall technologies, but also our measurement science across multiple platforms.
And all this as we continue to deliver to Agilent operating model through the cycle, and obviously also keep providing our customers with top reliable products to ensure their satisfaction and loyalty.
Thank you for your attention. I'm going to now give the microphone to Soon Chai.
Soon Chai Gooi
Thank you, Guy, and good morning, everyone. As you have heard this morning from Bill, Ron and Didier's presentation, one of our key focus is for order fulfillment to deliver value to Agilent. And to support this, one of the key focus of order fulfillment revolves around 3 key vectors.
The first vector is around operational excellence. It's about how we leverage the scale, the scope of Agilent. It's about how we streamline our supply chain for efficiency. It's about how we deliver cost savings to improve gross margin.
The next vector is what I call the supply chain technology. Essentially, Agilent has a broad range of highly sophisticated and complex products. As such, it is critical that we harness our engineering capabilities for cost improvement and also to support the continuous flow of new product introduction.
And finally, this customer experience has always been the hallmark of Agilent. And we will continue to deliver products of the highest quality, reliability and with the best service and support level.
Now let me elaborate a little bit more on each of these area, starting with operational excellence. Agilent order fulfillment organization was formed about a year ago, with the objective of leveraging the scale and scope of Agilent.
One of our key goal is to deliver cost saving. I'm happy to report that in FY '12, we deliver $56 million of cost savings. We are now able to leverage our purchasing power, capitalizing on economy of scale. So now it's not just one organization, but we're looking across all the different businesses within Agilent.
We also have intensify and increase sourcing in Asia, and this is leveraging from the EMG established network of supplier base. There are also efforts in place to reengineer our products for cost improvement. This could be in the form of design simplification. It could be in a form of part standardization and also material engineering.
In addition, we also had initiated in place to streamline our supply chain. Now when I talk about streamlining the supply chain, the focus is around 2 areas, one is the consolidation of our manufacturing site, and the other is the streamlining of our logistic network.
Today, we have a proliferation of manufacturing site as a result of the acquisition that we had made. Our plan is to consolidate and establish key manufacturing hub across the world. This will be our center of excellence. By doing this, it allow us to be efficient, effective and also operate at optimal level. To date, we have consolidated a total of 5 manufacturing site and 7 more site is currently in progress.
Another area that we're streamlining is the logistic network. Our product is shipped to more than 100 countries globally, and this is inclusive of some of our growing market within the emerging economies. As such, it is critical that we have the most efficient network. By doing this, not only will it help us to improve cost, but it will also help us to increase our service reliability.
Now then in my mind, one area that I feel that give us a lot of leveraging opportunity is in the area of supply chain technology. Agilent product is highly complex and sophisticated. In fact, it cut across the 3 domain of science: the world of electronics, you heard Guy talking about it; the world of biology, that's what Nick; and the world of chemistry, the world of what Mike has mentioned, right?
However, there aren't many elements that can be shared across the multitude of products. We have technology building blocks such as the ASICs integrated circuit, precision optics, precision mechanical, that is leverageable across multitudes of products. In fact, Ron has mentioned briefly about some of the leveraging opportunity, like A-to-D converter. Well, we also have ASICs that is used in scopes and also in mass spec products. The precision mechanical technology is used not only in RF microwave instrument, but also in microfluidics to create microchannel for the GC and LC products.
At the same time, we also doing a lot of standardization of common materials. For instance, the display, the power supply, the plastic molding, the sheet metal, the interconnects, by increasing the ability to share and leverage, it allow us to be more cost effective.
And in fact, if you look at some of the result, as a result of this standardization, we are able now to support a lot of NPI. In FY '12, we have a total of 52 new product introduction that was successfully launched.
In summary, I will say that we had made great stride in our cost saving improvement initiatives. We realized $56 million in FY '12. We will continue the momentum and deliver $50 million of saving in FY '13. Over the next 2 years, we will deliver another $75 million. Cumulatively, we will have contribute a total of $180 million of cost saving, and it will come from 3 major area, as I've gone through earlier on.40% of the saving will come from value engineering. So this will be in the form of product reengineering for cost improvement. It also includes standardization, sharing of standardized materials, leveraging our technology building blocks. 35% of the cost saving will come from procurement leveraging and also our sourcing in Asia, and the last 25% will come from streamlining the supply chain through site rationalization, and of course, logistic network optimization. Focus will be on an LSG and CAG, and our plan is to deliver a 1 point improvement in gross margin annually over the next 3 years.
So that concludes my short presentation. And with that, let me invite Mike, Nick, Guy and Lars on stage for Q&A.
Mark Douglass - Longbow Research LLC
Mark Douglass from Longbow. Guy, with the investments in modular, what kind of timeframe do you have right now for hitting ROIC targets? And what are your ROIC targets initially? And then secondly, looking at the modular again, are customers fairly agnostic towards the modular hardware manufacturer given that most of them probably stick with the leader in at least the development software in modular instrumentation? And just how do you win in the equipment side while pursuing the software side as well.
So let me start with the second part of your question first. Clearly, what customers look for is solutions. They want a solution to the measurement problem. Modular is just a means, but as I was mentioning, our strategy is to make sure we are -- propose to them the best solution. Is it modular? Is it instrumentation? To really solve their need. So the importance of software now then is to make sure that when they have an application, they get the same information whatever product they use. And also that they can relay and link to the development cycle. A little bit of what I wanted to mention in my talk is the fact that we have this very strong position early in the cycle with our EEsof product line design, the EDA tools. It is very important for them to stay connected with the design portfolio. So that's really are we believe where we can bring a clear contribution with the modular program and with the rest of our solutions in EMG and differentiate. To address your second part, clearly, it is a long-term program that we putting in place. We, as I have mentioned, we are very, very determined to win in this marketplace. We have the investment in place. We will keep investing to make sure that we get to what is needed at the solution space and the financials are integrated into overall EMG financials.
Maybe as it relates to the communications market, again, sticking in EMG just because I feel like that's an area where there's been a lot more volatility of reach [ph]. I mean, obviously, we've seen throughout the whole channel a bit of a pullback at the end of last year, and we're seeing it flow through the results. Now you're cycling through some tough comp. How do you tease out what's sort of cyclical versus secular just in terms of the overall dynamic? And more specifically, where do you think we are in sort of the voice data investments sort of in developed markets versus developing? And obviously, China on the base station side, we're waiting for that next phase of rollout, but where are the U.S., EU vendors? And then how are the trends in handset around smartphone kind of -- what do you think the next 12, 24 months looks like there? And have we sort of gone through the dip? Because there's a lot of question about Apple and some of the other vendors in that chain about what the investment is going to look like.
Thank you for your question. I probably may need a whole hour to address it, but clearly a number of things. The most cyclical part of this industry and this market is the production part, and this is really the cellphone manufacturing, and for us it means the test of this market. The rest of the segment, mostly in the R&D, is less cyclical and more steady, specially as we keep seeing investment going into 4G, and I was mentioning a number of other standards that just keep piling up and making the complexity of the network even greater, requiring more tools and more sophisticated tools. So the production test of handset is the most cyclical. It is clear that with really the integration of this whole market towards 2 major ecosystem between Samsung and Apple, it creates even more variation in when they invest, what they invest and also the pricing pressure that are existing in this marketplace. So for us, strategically, I would say that this part of the segment is an opportunistic segment that we will address when the margins make sense and only then as we go forward. Then the second question on the global evolution, clearly, smartphones, as I was mentioning, are still growing. They grew 40% this past year in terms of just adoption. There's a lot of room for more with the advent of cheaper cost smartphones, there certainly are. There's a lot of people that want more of these tools. But clearly, this will bring an impact and a need for broader network, for a more solid network. And there is a lot of talk, especially in China, for the deployment of 4G and the TD-LTE solutions that are -- the licenses have been approved. Now it's all about when these companies, when China Mobile will invest. But we believe that the overall base station business has probably -- is probably now bottomed out. We see some slow recovery. It will take more time, but it will come up over probably end of this year and later as China -- but also some other countries with that increasing the deployment of more LTE capable solutions.
Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division
Nick, Paul Knight at CLSA. Could you talk about NMR? It is the existing of the -- is I guess, the 900 megahertz product line. Now what do you have left, 600 and below? And does exiting 900, is that alone get you to breakeven in the business? And then talk about the rest of the markets you'll be in. Are they less price competitive, et cetera?
Nicolas H. Roelofs
Yes. So thanks, Paul, for the question. First for clarity. Our current situation is that in the NMR space, what we're doing is we're not quoting on products that we have yet to develop. So at the ultra-high field end, it wasn't the comment that I made today, and I'll clarify the comment I made today. At the ultra-high field end, we're not quoting on products that we have yet to develop. We think that there's just too much risk in the customer base in terms of deploying products ahead of technology, and we're focused on that technology. So for the next couple of years, we're not going to go into that space. It turns out that, that space has been funded heavily by stimulus, and so there's a lot of saturation in that space right now. Products still will be delivered by our competitor, but there's not a lot of new opportunity for orders anyway. That space is not very profitable. So that's probably the least profitable space. So it does help a bit. What we specifically talked about exiting was the OEM magnets, which are the ultra-high field for MRI. Where we sell the magnet, someone else -- one of the large medical vendors sell the console. We supply to all of them. That space has not been profitable at all. So that helps quite a bit in terms of what's going on. And then we're doing a fundamental restructuring by looking at where the market opportunities are over the next few years in the cycle. As I just said, ultra-high field, that opportunity is kind of weak over the next few years, so we'll keep an effort on the high-end R&D that's consistent with the market opportunity, but we will restructure some of the team and have, in fact, done that.
Nick, you talked about pushing mass spec into the clinical markets. Can you just talk a little bit more about your strategy timelines? How you'll leverage the Dako channel there. And then as a follow-up, I think you get the question on sequencing every year. As that moves more into the clinical markets as well, how do you think about your need to ultimately have a business there with instruments? And given all your capabilities in electrochemical detection, is that something you could develop on your own?
Nicolas H. Roelofs
Yes. So there's 2 questions. I'll answer the mass spec question. I'm going to defer to Lars on the sequencing question. It's his area to manage, and he's certainly put a lot of time and thought in it, so I'll defer that. But let me answer the mass spec question -- answer the mass spec question. We have registered our mass spectrometers as Class 1 devices. That means they're general purpose. As we look at the mass spec market, we think what will happen is there will be a lot of laboratory developed tests. And these are tests that are developed indirectly in the U.S., and they are tests that are specific, but are tests that are developed by the end customer, the clio [ph] lab. And they utilize that general purpose instrument platform to do specific testing. We think a lot of that's going to roll out. It's rolling out now. We're well-positioned to take advantage of that. We're working on deploying software to take advantage of that. We then think that once those tests get disseminated, they will be adopted both in emerging markets, which will go through lower regulatory barriers, and they will be adopted in the U.S. as people start making kits at a manufacturing sense to implement the actual LDT into a 510(k) or PMA. So there's a time cycle here. We're monitoring it. We believe we have the instrument on the right time cycle, and we're watching the LDT evolve to what will be a future 510(k) PMA, and we think we're smart enough to be positioned for that. And I'll leave the sequencing question to Lars.
Thank you very much, Nick. I think what I tried to address in my presentation is that we see a number of moves from the research arena into the clinical space. It's not limited to sequencing. Clearly, sequencing is going to be the fastest-growing modality, we think, into the cytogenetic lab as well as the AP lab, perhaps a little later. But we also see a terrific growth opportunity for the FISH probes, as well as the array product going into that area. Now more specifically looking at sequencing, the more we look at it, I think the question got to be answered. I mean, what are we after? What is the longer-term play here? By kind of standardizing the workflow, by having the scanner, are you going to long term be able to really do more business, more profitably than we currently do? What does the customer need? Do we need to provide a sequencing solution to our customers? Then that can be accomplished through different means. That can be an outsourced. That can be some type of arrangement with the large service lab that are fairly agnostic to the type of technologies that are held there. My personal thing today is that we need to do probably a combination of both. We believe that sequencing will find its way into the clinical space. It's going to take its time. We hear about replacement. We see the numbers from the companies out there, what they post, but we don't see that in use today. My personal belief that in the next maybe 3 to 5 years, we have to have a standardized validated workflow that might encompass also the sequencer, right? So today, we are playing at the sample prep. We are in the informatics arena. My belief is that we need to expand that as we move forward, right?
Charles Anthony Butler - Barclays Capital, Research Division
Tony Butler, Barclays Capital. Guy, the question is, what's the market around -- there's 2 questions actually. What's the market around handheld instruments? And the key is, what are the customers telling you they actually need in a handheld? Are they moving away from the feature-rich boxes into handhelds at a greater rate? In other words, more units? And second, back to Nick for you, back to Paul's question on NMR. I recognize the concerns or the work done on changing manufacturing and also exiting the OEM for magnets. But the question really becomes, if you exit the high-end field for NMR, do you actually create a perception that you actually deliver an inferior product to a particular customer even if they don't need a superior product, and in so doing, at what point do you actually consider exiting the business altogether?
So let me start. And thank you for the question. The RF handheld is really the market segment that we look at here. So probably a market that I would estimate between $350 million to $400 million, growing 10% currently. It is obviously driven by the fact that more and more, especially in the telecom world, is this complexity of so many signals happening everywhere that the technicians need design -- need tools that are able to get the resolution, have the accuracy to really understand what's happening. So that's on this side. But we also see a lot of our customers, is it in the aerospace field? Or in many other sectors where they just need a more rugged solution, where before they could not even use any product because it's some of the environment, especially hot, would not allow any of these tools? So I really believe it is a growth opportunity for us. It is not cannibalizing what we have in our current portfolio, and it's a unique way for us to deploy our core technology into this packages.
Nicolas H. Roelofs
On your NMR question. I think you have to dissect the NMR business a little bit to answer the question, so it's going to take me a minute to give you the full picture here. There's 3 pieces in NMR, there's the probe technology, there's the console technology and there's the magnet technology. Today, it is true that customer perception is that if you make the biggest magnet, you must have the leading edge technology by default. And sort of like, if I have the biggest engine, I must have the best car, and car people know that the biggest engine does not always make the best car. We will -- just to be clear, we will continue this research on magnet technology. We're not abandoning that research. We're just not quoting products that we haven't built, so just to be clear on that comment. But what we're doing is we're focusing on developing the best probes and the best consoles. We will bring those technologies to market, and this is part of the endpoint of a 3-year effort and then continues. But the first evidence is already out, we're delivering probes with Electronic Measurement through technology. I wish I had a picture to show you, and I'd be glad to show it to you of the inside of our next-generation console. And you go from something that looks inside like spaghetti and wires, leveraging the ASICs technology and the new technologies within EMG, a console that's the size of 3 shoeboxes put together filled to the brim with wires and connectors, becomes a console that's smaller than a shoebox with one small module and that, that drives all the console. And I have a picture of this that I've shown at other talks. So what we will do is we will deliver bleeding-edge technologies implemented in consoles and bleeding-edge technologies implemented in probes, some of that is shipping today. And that will be immediately deployable to the mid-field technologies. We will then continue some research on the high-field magnets. When we develop breakthrough magnets, we'll come back into the market with those. It will be a challenge for our market to make sure that the customers understand that they are getting bleeding-edge technology when they buy a 400, 500 or 600 from us, but that bleeding-edge is really in the pieces that are consoles and probes. And this is just an artifact of the way NMR is developed, and we think it's a story that customers will understand once we can deliver and demonstrate it, which we're starting to do now. So we think we have a real opportunity. There isn't a horizon on paper today that says we exit the NMR business. We think we can be very successful at the midrange and then leverage that upfield, which is the way we intend to go. So obviously, we evaluate this all the time, businesses that can't over a long cycle meet our operating 20% and drag the group have to be evaluated. But right now, that's not a paper exercise, let alone an active exercise.
Lars and Nick, can you maybe talk about -- I think Bill mentioned earlier and Guy about aerospace and defense what you saw in February is kind of sequestration was becoming more real. Can you maybe, in your 2 businesses that have a little bit more government and academic exposure, talk about what you saw in February or what you're seeing now in those businesses? There's some debate as to whether your funding's already been held back quite a bit, and so you won't necessarily see a dramatic impact near term but just -- so maybe just what you're seeing there? And then Mike, can you maybe talk a little bit about what you're seeing in China in emerging markets? There's also debate around how much kind of an over built in say a country like China and some of the more chemical and industrial pieces of the business, maybe what you're seeing there.
All right. The first is for me. Do you want to speak? It was for me, the first question, probably more...
Well, I think Bill had already mentioned that aerospace and defense is pretty weak in February, so I was curious for Lars and for Nick what they were seeing in their government and academic markets kind of real-time?
Nicolas H. Roelofs
So let me jump in first and then, Lars, if I get any pieces wrong, please direct me. We may have very interesting answers for you because my current focus to answer is going to be heavily on CapEx, and Lars is just probably going to be more on consumable. But what we're seeing in the academic market from a CapEx point of view is a lack of clarity and so a pause. And basically, everybody is frozen up on their orders because they're not sure how much sequestration is going to occur. So we've seen some orders come through, but there's a lot of "Will I get the full order and therefore, buy the full high-end instrument? Or will I not get the full grant amount, and therefore I have to buy a lower-end instrument or not have enough for an instrument?" So there's a lot of lack of clarity and uncertainty in the market. That's affecting the U.S. directly right now, and we see a little bit of it in February. It's also affecting in a worldwide basis because a lot of U.S. grant money co-funds grants in emerging countries. And so you'll see a little bit of that in our emerging portfolio. We think that the minute there's clarity, we're going to see momentum. So it's not like -- obviously, if there is 0 sequestration, we're already a week in, so if there's one week of a sequestration, then we come out of this meeting and it's solved, then that will have a small effect. If there is 6 months, that will have a bigger effect. But just clarity on where that timeline is going to allow the researchers to go, "Well, I can only afford the midrange instrument or I can afford the high-end instrument," which is part of the debate. So right now, it is a drag on our academic CapEx and [indiscernible].
Sure. So I think I'm in 2 completely different markets obviously. You take the pathology clinical channel, cancer diagnosis, that's not the first one that you hit when the times get tough. So we see this market is being very resilient, it continues to grow in a very healthy way. Actually, capital hasn't been stronger so we see really variable bust demand out there. I think in all fairness, I mean, if I go back maybe 14, 15 quarters, I think the last 2 quarters, we had a what I would call the [indiscernible] temporary dip in the overall market growth rate. And I think the reason for that is that you had a lack of [indiscernible] there was no new real product introduction hitting. And when you had that, we need to [indiscernible] it at the higher price point that's a tractor [ph] for that. So in my book, very resilient and actually, very healthy investment level, both for consumables and for CapEx. In terms of the Genomic business, again, it's not the large capital equipment that Nick is referring to, it's still capital. We actually see our business being robust, healthy, and we don't see this trending down, and actually won't see that by, I believe, anytime soon. We would see some type of constipation in the system. It will typically be in the U.S. market. But for the rest of it, the APAC and Europe actually looks pretty good right now –
Michael R. McMullen
So let's go to a different part of the world, which I think the dynamics are a lot different. So I know there's a lot of questions about is it game over in China? Is the infrastructure build out? I don't see that at all. I think this market has lots of legs still to it. If you go back to a discussion today about these global megatrends, so be it in energy, food safety and environmental, there's still a lot of investment that is occurring today and will continue to occur over the next several years. Buildout in terms of energy capability for energy and chemical downstream processing, just turn on the TV, you can see the environmental challenges they're having in China, and they're by no means not investing in this area. So they're making tremendous progress there, such as environmental safety and food safety. But they still have a long ways to go, if you would talk to officials of the Chinese government, they would tell you that half of their laboratories doing food safety don't yet have the capability they want to do the analysis and forced regularly have in the books. They're expanding capacity in places like the western part of China. I think the big -- biggest test -- biggest validation I can make in my statement is I'm backing up that with in terms of how we're spending our money. So we're investing internally. We're not taking our foot off the gas at all in China. In fact, I think the reference is made earlier. We just brought on a brand-new CEO -- COE, center of excellence in Shanghai that cost us $7 million. And we'll host a big Agilent Technology Day in China in April. We have 40 or 50 new college hires coming on every year into the CAG analogy [ph] channel. So we're backing up our view of the long-term market potential with real investments. So I think this market has lots of legs still left in javelin [ph].
Joel Kaufman - Goldman Sachs Group Inc., Research Division
Joel Kaufman from Goldman Sachs. For Mike or Nick. On the service side with cross lab, there are various players out there offering service contracts on multiple vendor instruments. How do you set yourselves apart there? And do you have any incremental investment you need on that side of the business?
Michael R. McMullen
Yes. Great question. I'll jump in on this if you don't mind, Nick. So I probably want to [ph] come clear as I wanted to in my presentation, but there's a lot of -- there's a few larger companies in our space, along with Agilent, that are able to provide multivendor services. We're not interested in being in just a game where it's a peer price game. It's all about our ability to add value. So we actually have a large R&D group in the space. So we have actually developed a set of analytics that we show our customers because it actually helps them optimize their laboratory operations. So it's not just a matter of us going to say, "Hey, don't worry about it. We can't take care of all your equipment." We also, including the competitive instrumentation, can show the lab managers how their equipment is utilized, where they are technology refresh, a whole bunch of things that you think your customers might know but they don't have that insights in terms of what's going on with the laboratory operations. So I think the secret sauce, if you will, to our approach in cross lab, I think it's wise, on a growth opportunity for us, but also a high margin opportunity for us is the ability to provide additional value on top of a core set of services.
Derik De Bruin - BofA Merrill Lynch, Research Division
I have 3 questions for Guy and Nick. Guy, first, given that there are now sort of 2 ecosystems in the smartphone space, could you talk about how you're positioned in terms of Samsung and Apple and what products you sell there? And is there potential to gain share and that I'm just curious about that? Nick, given that neither you nor your major competitors in LC have really disclosed the revenues from this market, and I'm a little, particularly for UPLC -- UHPLC products. I just wanted a little bit more color around your numbers for claiming #1 market share in the UHPLC market? It sounds a little -- I'm just curious on that, given that although that the market with a full-blown system. And then for both of you, there have been some comments, Andrew [ph] made some comments prior about competition in Asia. I'm just wondering, given where the yen is right now, does this make Shimadzu or enrich [ph] some of these companies, are the Japanese companies more competitive in that market?
So let me start. Obviously, I will not be able to give you insight on our direct sales to specific customers. This is not something we can speak about. You know that we are a major player in this industry for -- and again, we are very unique because we propose a whole suite of solutions so it's not just one instrument, for instance, one type of instrument for the competitive Japanese company that you just mentioned. We serve a very broad set of needs across the whole environment, from R&D to manufacturing and from base station to the handset manufacturers. So this is very different from the competitors that you could look at. Is there a price differential? Is there a pricing aggressiveness by some of the competitors or even everybody? I would say obviously, yes, in our low growth environment where the -- our number of big deals are very limited or very well identified. There is ongoingly a very aggressive pricing situation, and the situation with the yen does not really change it. It's just the situation. The fact of some markets that we address and most importantly, the overall handset manufacturing test. That's what I mentioned earlier. This market for us is really opportunistic, and we take deals that are only when it make sense for our bottom line.
Nicolas H. Roelofs
And Derik, on your question around LC, let me first categorize it by saying the way we think of UHPLC is to the applications. So we think of traditional HPLC as sort of a method around 200 bar. We think of UHPLC as anything above about 400 bar. So that's kind of the way the methods developed, so there's a lot of methods around 200 and then there's a lot of methods around 600, 800, 1,000. So that's our definition. So to be clear, that's the way we define the market. Second, when I speak about it, I speak about instruments just because the way we Agilent report to you, while we report service and the group number and we report consumables in the group number, I'm speaking about instruments only. So I believe that, that's where we have a situation where our UHPLC instrument market share is #1 by far. I should point out clearly that when we introduced the Infinity line, Infinity 2 family of instruments, so our 1200 Infinity series, this line was introduced in 2010 and late '11, it came out further. That line is 100% capable of 600 bar. So every one of the instruments in there goes from 0 to 600. So today, we don't sell an instrument, new that isn't a UHPLC instrument. So 100% of our current sales are going out there as UHPLC. Now our highest end goes from 0 to 1,200 bar, and our midrange and low-end instrument go from 0 to 600 bar. But what we're seeing is we're enabling the customer to convert their methods to that high-pressure faster, and that's what's driving both the overall market, double-digit growth of that sector and driving our own penetration in the market. Finally, your question on Shimadzu. The yen has an effect, no doubt. But at the end of the day, it goes back to what our core is and it's the fundamental I just told you. We invest R&D to produce leading-edge technology. In the specific sector of LC, while we don't crow as much about our LC technology as we probably should, all of our instruments, as I just told you, are UHPLC compatible. And we have the highest technology instruments out in the marketplace. Shimadzu has a business operating model where they're quite content to have their operating profit at 0% to 5%. This is a fact. So yen or no yen, our challenge against Shimadzu is not the yen moving, it's their operating model acceptance of a 5% operating model and our operating model in tolerance of 20%. I grant you were in transition, so the full disclosure, right? Our LC business does quite well, so it's not in transition. So our issue is in order for us to win the game, we got to have the best technology because at the end of the day, if we don't have the best technology, the guy with the 5% operating model is just going to win. So we've got to have the best manufacturing, leveraging the best technology, and we don't see Shimadzu as a big negative on the radar. We watch the low end, we protect the low end, but they're not the big center point of our target.
Daniel Brennan - Morgan Stanley, Research Division
It's Dan Brennan from Morgan Stanley. I have just 3 questions. First one is for you, Guy and Nick. Could you just comment on the February slowdown that you commented on, both the life science and the aerospace defense business? Like how does that compare to kind of what you built in for your 2013 guidance range? And then secondly, just back to Guy on the comm market, what can investors look for just to get a sense of Agilent's comm business? Because obviously, there's a lot of positive growth going on globally, but yet the business may be given some comps or end market exposure has kind of weakened. When can we see that business bottom on a year-over-year basis? And then finally, Mike, I'd love to hear your comment on the GC upgrade cycle and how should we think about that, how impactful could that be?
Nicolas H. Roelofs
So for clarity, we're not changing any guidance that we -- that's different than we gave you 3 weeks ago, right? So we built in, as Didier told you, we built in a model that says that sequestration at the high end of the range is almost nonexistent, and at the very low end of the range is full impact. And we're still in that moving model because nobody knows what sequestration is going to do. So February is part of the conversation.
So on your question about -- for EMG, the statements of it -- adequate that -- for February. For the question on communication, clearly as I mentioned, I believe that the overall wireless communication segment has very strong fundamentals. The macro drivers are real and for over the long term, there will be more investments. Short term this year and last year have been lower level of investments and in the past, very heavily driven by manufacturing investments that are no frankly come to more questioning as most of the companies have now to reevaluate the investment they made, make some productivity gains on the standalone [ph] better what's happening in LTE and how much we test and basically are getting more operational on this. It's coupled to an ongoing drive for cheaper and this quite heavy price pressure, as I mentioned, brings uncertainty on that part of the market. And that's really what we're seeing currently. Once we've gone through this, I believe we come back to the solid fundamentals in the comm business.
Michael R. McMullen
In regards to the GC and the GC/MS replacement cycle, you may recall in some of those, our prior earnings call, I've been pointing to the slowdown in the replacement market, particularly in the U.S. and Europe. There's a reason for why the gas [ph] business has developed in terms of growth rate. So we're actually quite bullish about having a product coming out about the time we hope that the market starts to pick up and we start to see the GDP improve, particularly in places like the U.S. and Europe. Just a kind of a few factoids here. Typically, our customers keep the products 7 to 10 years for a gas chromatograph, maybe 7 years, probably 7 years on the GC/MS single quad. It just so happens, our last major introduction on the single quad GC/MS was 7 years ago because we've been on an investment path on the high end over a few years. So the platform is about hitting the time of the market where the customers are looking to replace their equipment. Right now, however, they still are strained in terms of their ability to release funds and have been holding off purchases, but we think we've come to market at the right time because our previous platforms have been out there for say 5 to 7 years depending on the model. And we're clearly the leader there and customers want to protect their investment, which we’re trying to help protect the investment as well. So we think we're coming to market about the time that replacement cycle [ph] hopefully soon will take off.
Amit Bhalla - Citigroup Inc, Research Division
Amit Bhalla from Citi. A question for Guy. Guy, can you talk a little bit about cellular tests and in specific, Teradyne LitePoint. What are you seeing from those guys from a pricing perspective? And how are you factoring that into your share and margin expectations?
Sure. It comes back a little bit to some of our earlier comments. Speaking about volatile market, they are really at the core of the highest volatility possible in any of the markets. And it is, as I mentioned, a market that obviously we're participating in or we're working closely with many customers, but we also make sure that we protect our margins that's going forward. And depending off the price situation, we have to know in some of the deals that we have seen in this marketplace.
Amit Bhalla - Citigroup Inc, Research Division
How much pricing pressure are you seeing from them? How much pricing pressure are you seeing from them in the market?
I would not target them as these companies. So it is just the reality of this market itself more because of the concentration of this market to fewer players that have buying power and sometimes some terms that are -- make them acceptable or not acceptable.
Vamil Divan - Crédit Suisse AG, Research Division
Vamil Divan from Credit Suisse. So a couple of questions on the diagnostics and genomics side. So one, the new -- this platform you mentioned, the release this week, if you just provide a little bit more maybe qualitative commentary on what the customers were telling you. From what we've heard, some of the dividend advance [ph] but there's also some other steps that maybe keep the time difference not as significant as it might be to competitors. And then second one on the companion diagnostics, you've had some advances there. Just -- I sense -- I think there's a lot of questions still around as pharma and diagnostics talk more about companion diagnostics. How much of the economics -- do you think the diagnostic side can extract from that equation?
Yes, I think those are good questions. Well, let's hit the Dako Omnis first. I mean, the feedback we have based on the first kind of 4 days out live basically marketed to 4,500 pathologists [ph]. It's beating our expectations. The way we thought about Dako Omnis was to address the segment of the market where Dako had have most share for a number of years, and those are particularly the larger volume labs that run different modalities. They service customers of large service labs in the U.S. if you kind of paint the picture. These are huge in terms of the number of slides they're running. So the specifications for Dako Omnis is to provide volume throughput, speed in terms of immunohistochemistry and ISH pictures service lab somewhere in the world that receives the samples in the morning and actually will be able to ship out the full results, the immunohistochemistry and the ISH at the same day to that customer. We're not having that customer to wait for another 24 hours and 48 hours until these results are there. So there is a tremendous value for these larger accounts to get the features of the benefits of the Dako Omnis system. So the throughput time to the first results, the overall capacity looking at the immunohistochemistry slides. I mean, you can quote any number but basically, the data on file from Dako would tell you that the throughput would be 50% greater than what is considered to be standard and gold standard out there today. So the throughput, the flexibility of the system being able to control the temperature and the reagents is very, very important, because if you look at the portfolio of 150, 160 reagents, you have a significant temperature sensitivity for some of them. And that has been an issue that has been voiced to us as part of the development that we now effectively address that we can actually provide a very homogene [ph] and controlled environment out there. So the features is really what I tried to articulate during the presentation and the feedback is good. So where do we stand in the development? Well, we have been into customer sites. It's probably a handful today. We run both immunohistochemistry in these slides and the feedback is very compelling. We have a very hard baseline in terms of the quality of the results, which is the one that counts at the end of the day, and that's compared to the current outlook that we have. And I'm glad to report out, at this stage, we can stain from a quality point of view slides at or above the level of the current auto stainers. So the quality of the slides are there. So what we do now is we are validating the systems. We will be moving towards call it a feed site entry in the next couple of weeks where we will hit probably somewhere between 10 to 15 sites, where we're going to build more of the customer testimonials and so forth and then we're going to move towards the summer in to a full commercial release. So that's basically fundamentally the program and some of the feedback we hear from this week of Dako. It's actually beating our expectations at this point in time, which is good.
Now back to the companion diagnostic. I mean, the question is what are we in there for and what's the value for us? Well, number one, we do what's our mission is we fight cancer. And we ensure that the patients are getting treated with the right drug. The consequences are not being able to respond to one of these aggressive compounds is terrible and the cost for the society [indiscernible] is huge.
So we bring a lot of value by the intelligence that we put into medicine. Do we make money? Do we make business out of it? Yes, we do. We have -- it's a profitable revenue, profitable work. At the end of the day, we don't do it as a consultant because it's not scalable enough. We want to have a regulated and a validated kit, class 3 kit out where we as Dako and Agilent will be on the drug label. That is the end game for us. That's why we are in this business and actually, more and more of the larger pharma companies appreciates the freedom, the standalone entity of Dako not being tied up to another pharma company and we see a number of these that they have announced [indiscernible] a pipeline which is actually expanding.
Now do we get the right value of the diagnostic compared to the end treatment? Well, clearly, no. But I think the pendulum is swinging from being considered as an evil maybe 10 years ago, the diagnostic partner now becomes essential in a combination with the pharma to get one of the oncology [ph] compounds approved in the market.
So we have examples right now in the days deals that we have struck where the pharma companies are actually coming forward and giving us [indiscernible] and marketing subsidy to ensure that we can invest in the right type of resources to bring their drug and our combination in our assay to the market. I think it's a long shot to say that we're going to have 50-50 of the market. It might be a vision but clearly, if the pendulum is swinging and the conversation we are having today is completely different from the conversations that took place maybe only 5 years ago.
William P. Sullivan
Well, thank you all very, very much for your attention, attendance and great questions. Clearly, our priorities are very straightforward and hopefully, you heard from the 4 presidents and Soon Chai, our commitment to get back to higher organic growth rate, to drive manufacturing efficiency and ensure that the Dako acquisition has a return for our shareholders. We're clearly assuming that the economy is going to start to improve in the second half and 2014 will be better. We believe making the investment through this [ph] period of time is the right thing to do, but we haven't lost sight on the shareholder.
This year, if in fact, that we hit our guidance, we'll generate $1.25 billion of operation cash flow. We increased dividends by 20% and increased our stock repurchase to $500 million. So I believe this balance that we can, in fact, deliver the organic growth rate and get back in our model still be shareholder-friendly and the process will allow Agilent to get back in the growth trajectory, as you can see from Didier's position that we are successful in implementing this strategy and the economy cooperates with us a little bit, we will be able to drive very substantial increase in our EPS.
With that, thank you all very, very much. There's lunch in the back for all of you. And again, we really appreciate your attendance today.
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