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Agilent Technologies (NYSE:A)

F1Q 2014 Earnings Conference Call

February 13, 2014, 4:30 p.m. ET

Executives

Bill Sullivan - President and CEO

Ron Nersesian - CEO, Keysight Technologies

Didier Hirsch - SVP, CFO

Mike McMullen - President, Chemical Analysis Group

Fred Strohmeier - President of Life Sciences and Diagnostics Group

Neil Dougherty - CFO, Keysight

Guy Séné - SVP of R&D and Sales

Alicia Rodriguez - VP, Investor Relations

Analysts

Tycho Peterson - JPMorgan

Brandon Couillard - Jefferies

Paul Knight - Janney Capital

Isaac Ro - Goldman Sachs

Ross Muken - ISI Group

Tim Evans - Wells Fargo Securities

Derik de Bruin - Bank of America Merrill Lynch

Jon Groberg - Macquarie Capital

Patrick Newton - Stifel Nicolaus

Doug Schenkel - Cowen & Company

Dan Arias - UBS

Bryan Kipp - Janney Capital Markets

Operator

At this time, I would like to welcome everyone to Q1 ’14 Agilent Technologies Incorporated earnings conference call. [Operator instructions.] Alicia Rodriguez, you may begin your conference.

Alicia Rodriguez

Thank you, operator, and thank you and welcome everyone to Agilent’s first quarter conference call for fiscal year 2014. With me are Bill Sullivan, Agilent’s President and CEO; Ron Nersesian, CEO of Keysight Technologies; and Didier Hirsch, Agilent Senior Vice President and CFO.

Joining in the Q&A after Didier's comments will be the presidents of our chemical analysis and life sciences and diagnostics groups, Mike McMullen and Fred Strohmeier. Also joining from Keysight will be Neil Dougherty, CFO; and Guy Séné, Senior Vice President of R&D and Sales.

You can find the press release and information to supplement today's discussion on our website at www.investor.agilent.com. While there, please click on the link for Financial Results under the Financial Information tab. There you will find an investor presentation along with revenue breakouts, business segment results, and historical financials for Agilent's operations. We will also post a copy of the prepared remarks following this call.

Today’s comments by Bill, Ron, and Didier will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website.

We will make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors.

Before turning the call over to Bill, I’d like to remind you that will host its annual analysts meeting in New York City on March 6. Details about the meeting and webcast will be available on the Agilent investor website two weeks prior to that date.

And now I’d like to turn the call over to Bill.

Bill Sullivan

Thanks, Alicia, and hello, everyone. Today Agilent reported first quarter orders of $1.68 billion, down 2% from last year and flat on a core basis. Q1 revenues of $1.68 billion were unchanged from a year ago, up 1% on a core basis. While revenues came in at the low end of guidance, adjusted earnings of $0.67 per share were at the high end of the guidance, up 8% from a year ago. Operating margin was 17.6%.

We saw a mixed business environment with continued steady growth in life science and applied markets. This was offset by continued weakness in our electronic measurement markets, particularly in aerospace and defense. Despite some ongoing economic headwinds, we continue to benefit from our commitment to manage expenses and reduce manufacturing costs.

We also continue to make excellent progress in preparing for the split of the company. On January 7, we announced Keysight Technologies as the name of the new EM company. We expect the separation to be completed by early November.

As I indicated last quarter, Agilent will increasingly differentiate our electronic measurement and LDA businesses in preparation for the company’s separation. Today, I will share performance highlights for the life science diagnostics and applied markets. These businesses will be the focus of the new Agilent, as the company continues under my leadership.

Following my remarks, Ron Nersesian will discuss our electronic measurement performance, which will be the focus of the new spinoff company under his leadership. Finally, Didier Hirsch will provide a more detailed discussion of Agilent’s overall financial results as well as our guidance for fiscal second quarter and the full year.

Turning to LDA, our first quarter performance continued to show solid revenue growth across instruments, services, and consumables. Q1 revenues of $1 billion increased 5% year over year, reflecting strength across most end markets and a healthy Q4 backlog. Q1 orders of $979 million increased 2% over last year. The slowing in the order growth is driven by weaker demand in academic and government markets.

Operating margins were up 210 basis points to 19.2%, consistent with our margin expansion goals for the businesses. We continue to focus on attractive end markets, our leading product portfolio, and significant operational leverage. Our end market performance in LDA was particularly strong in pharmaceutical, biotech, clinical, food, and forensics. Pharma revenue grew 8% year over year, with strength in Europe and Japan offsetting slow demand in the U.S.

Food revenues were up 14% over last year, as globalization of the industry continued to drive demand for food safety. Forensics grew 26%, driven by the need to identify and characterize new designer drugs entering the global market. And [energy] was up 3%, led by Europe and large refinery projects in the Middle East.

Conversely, academic and government markets declined 10% year over year. Research spending remains constrained, impacted by slow budget releases, particularly in the U.S. and China. Diagnostics and clinical revenues were up 10%. The [unintelligible] was slow, due to a very slow start for the quarter, but the clinical business was robust, driven by CGH arrays and target enrichment.

On a regional basis, LDA performance was mixed. Europe continued to see the strongest regional performance, driven by strength in pharma and services. Asia, ex-Japan, also showed strong growth, while Japan was down primarily due to weak currency. Americas was up slightly, constrained by delayed budget releases in Canada and the United States.

Within LDA, our life science and diagnostic group, or LDG, had Q1 revenues of $592 million, up 5% from a year ago. Orders of $554 million were flat year over year, reflecting softer instrument demand in the Americas and China. Operating margin was 17%.

We signed a new companion diagnostics agreement with Merck [and Amgen]. Development projects will include treatments for lung, breast, and gastric cancer. And LDG released the third version of our intelligent system emulation technology for our 1290 Infinity LC systems. The new [isat] allows for emulation of competitors’ systems.

Our chemical analysis business continues to show strength across both its instruments and reoccurring revenue portfolios. Q1 revenue grew 6% to $417 million, driven by chemical and energy, as well as non-government food safety markets. Q1 orders grew 4% to $412 million. Operating margin was 23%.

In the quarter, chemical analysis launched two spectroscopy systems. The new ICP-MS and MP-AES systems introduced more streamlined operational features and a user-friendly interface. This will enable a wider range of applications and improve accessibility to a broader range of lab personnel.

LDA’s outlook for fiscal FY2014 remains positive, as the world economy continues to improve and budgets are settled. While the comparisons will get more difficult starting in Q2, we expect growth trends to continue. Our gross margin proven initiatives continue to progress well, and we see additional opportunities to grow share with new product releases in the pipeline.

Our priorities will continue to be centered on improving the customer experience, driving organic growth, increasing our margins, and improving our return on invested capital. LDA revenues for the second fiscal quarter of FY14 are expected to be between $995 million to $1.02 billion, or 4.1% core growth at the midpoint. We expect operating margins at the midpoint of 18.1%.

For the full year, we project a revenue range for LDA of $4.03 billion to $4.13 billion. At the midpoint, LDA’s operating margin is expected to be 19.5%. Didier will provide additional details in his commentary.

Thank you for being on the call. Now I’ll turn it over to Ron to talk about the electronic measurement business.

Ron Nersesian

Thank you, Bill, and hello, everyone. For the first quarter, the electronic measurement group reported orders of $699 million, down 7% year over year. EMG revenues also declined 7% in the quarter to $671 million. While orders were consistent with expectations, the impact of Lunar New Year on our ability to recognize revenue late in the quarter was greater than anticipated.

This resulted in revenues that were below our guidance. The book to bill ratio was 1.04 for the quarter. Despite lower than expected revenues, solid gross margin management and disciplined expense control yielded an operating margin of 15.2%.

Taking a closer look at our end market performance, aerospace and defense revenue declined 27% year over year against a tough compare. The first quarter of FY13 was the peak of our aerospace and defense business, prior to U.S. sequestration budget reductions.

Consistent with the positive signals that I noted last quarter, industrial computers and semiconductor revenue increased 4% year over year, driven by investments in next-generation semiconductor process technologies.

Communications revenue declined 5% year over year due to softness in wireless R&D and broadband spending. Wireless manufacturing was up 1% year over year. Long term growth drivers remain intact. Wireless standards continue to evolve, driving investment in emerging network technologies. As a result of two key product introductions, EMG is well-positioned to capitalize on these macro trends.

As I’ve said before, we are committed to winning in the wireless ecosystem. In November, we introduced a new modular wireless manufacturing test platform called EXM. It is getting strong reviews for both cellular and wireless land tests, and just two weeks ago, we introduced a major new wireless R&D platform called UXM. Both the manufacturing and R&D platforms have multiformat architectures to support 4G standards and can be upgraded as standards evolve.

Another key part of our product strategy is to build a modular product offering that leverages our technology leadership in feature-rich instrumentation. Our modular business continues to gain momentum, with orders for PXI and AXIe offerings again showing strong double-digit growth in Q1.

Shifting from Q1 results, we remain focused on our FY14 priorities which are to launch ourselves as an independent company, focus solely on electronic measurement customers, strengthen our position in wireless communications and modular solutions, and to continue to generate strong profit margins for our shareholders.

As Bill commented about the split, I am pleased to report that we continue to make excellent progress and remain on track to separate EMG from Agilent. On January 7, we announced the name of our new company as Keysight Technologies.

As we plan to begin operating under the Keysight Technologies name as a subsidiary of Agilent, effective August 1, the spinoff is expected to occur in November. Despite the extensive work involved with the separation, we remain intensely focused on managing our business without interruption and delivering the quality, innovation, and service that our customers deserve and expect.

Turning to our outlook for Q2, Keysight revenues are expected to be in the range of $705 million and $745 million. We expect operating margins at the midpoint to be 18.2%. With expected growth of approximately 8% in the second half of FY14, revenues are now expected to be in the range of $2.84 billion to $3.0 billion, or 2% core growth at the midpoint for FY14. We expect operating margins at the midpoint to be 18.7%.

I will now turn it over to Didier to provide more details on Agilent’s financial results.

Didier Hirsch

Thank you, Ron, and hello, everyone. To recap the quarter, our revenue, adjusted for $5 million of unfavorable currency, was $6 million, or 0.4%, below the midpoint of our guidance, but our EPS was $0.01 over. Once again, we were able to deliver on our EPS commitment thanks to our disciplined management of expenses, in line with our operating model.

Please note that that Q1 core revenue growth by segment and by geography is reported in the slide deck, posted on our website. This quarter, currency subtracted about 1.5 percentage points from our year over year revenue growth and acquisitions had no material impact.

A final note on Q1, we bought back $100 million of stock in Q1, and therefore completed the $1 billion stock repurchase program authorized by the board in May of 2013.

I’ll now turn to the guidance for our second quarter. We expect Q2 revenues of $1.72 billion to $1.74 billion and EPS of $0.71 to $0.73. At the midpoint, revenue will grow 1% on a core basis. Our 18.2% projected operating margin at the midpoint will be 60 basis points higher than in Q1, and 110 basis points lower than Q2 of last year.

Remember that we initiated a drastic cut in discretionary expenses early February of last year that resulted in over $30 million of expense savings in Q2 last year, so we face a tough compare. While we are maintaining our spending discipline, we’re also investing in key growth initiatives.

Now to the revised guidance for fiscal year 2014. We’re now expecting fiscal year ’14 revenues to range from $6.9 billion to $7.1 billion and at the midpoint this translates into 3.6% core revenue growth. As stated by Ron, EMG has revised down its midpoint revenue guidance by $55 million, to a year over year core growth of 2%. Midpoint operating profit guidance for EMG has been reduced by $35 million and operating margin guidance at the midpoint is 18.7%.

At the same time, LDA has increased its midpoint revenue guidance by $5 million to a year over year core growth of 5%. Midpoint operating profit guidance is increased by $4 million, leading to an operating margin midpoint of 19.5%.

Agilent EPS is now projected to range from $2.96 to $3.16 and the midpoint of $3.06 is down $0.12 from the November guidance, which represents a reduction of $0.13 coming from EMG offset by an increase of $0.01 from LDA.

With that, I’ll turn it over to Alicia for the Q&A.

Alicia Rodriguez

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

Question-and-Answer Session

Operator

[Operator instructions.] And your first question comes from the line of Tycho Peterson of JPMorgan.

Tycho Peterson - JPMorgan

I’m trying to walk through the math on guidance here. You’ve cut revenues by $15 million. If you assume maybe a 6% decremental, then you’re talking $25 million to EBIT or $0.06. So why are you cutting the bottom line so much? Maybe just talk about why you don’t have additional leverage you could call to maybe offset some of the impact on earnings?

Didier Hirsch

As I mentioned, the $55 million revenue decline for EM triggers $35 million operating profit decline. And I’ll let Ron just talk about the incremental decremental.

Ron Nersesian

With regards to the decremental, we’ve looked at that closely, and we are anticipating growth of 8% in the second half. And accordingly, we are continuing to invest to bring up new platforms that we think will drive that growth in the second half.

Tycho Peterson - JPMorgan

And just to follow up, Ron, in your comments you talked about the latest from the Chinese, that looked bigger. Can you maybe just talk to us about whether things have picked up post the quarter and do you expect those delays to come through in the first half?

Bill Sullivan

Our orders were right on expectation at $699 million. What happened was we built about $15 million in pipeline due to Lunar New Year. So this is basically products that we’ve received orders for, we shipped, but we’re not able to recognize revenue because of the way Lunar New Year fell. We anticipated and forecasted that to a certain extent, but it was greater than what we thought. We plan to flush that backlog, that $15 million worth of backlog in Q2, as well as have a sequential increase of $39 million to bring our revenue up $54 million in Q2.

Operator

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

Brandon Couillard - Jefferies

Ron, could you elaborate a little more just on the puts and takes to the EMG guidance takedown? What are you factoring for the aerospace and defense business? And if you could give us a view around the comms segment, that would be helpful.

Bill Sullivan

For the aerospace and defense segment, that is the biggest segment that really is driving the change. We had expected that to be flat. It actually was down 27% because of the tough compare. So in particular for the year, we’re moving it from flat for the year to down 5%. The comms business, we were forecasting 3% growth before, and now for the year 2% growth. And industrial computer and semi, we were forecasting 5% growth, and we still are. And that business has been turning, especially in the semiconductor space.

So the decline is basically driven in the aerospace defense spending. Even though the budget was approved in September, it’s been a slow start. We have seen more acceleration towards the end of Q1 on quote activity and orders start to pick up, but we do believe that there’s a bit of a lag in that recovery.

Brandon Couillard - Jefferies

Any chance you could give us a view around the orders within EMG by division?

Bill Sullivan

No, we mainly don’t report that for competitive purposes.

Operator

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

Paul Knight - Janney Capital

Could you talk about the [unintelligible] PXI and the dynamics surrounding PXI versus the box business. You know, double digit PXI would suggest you’re, I guess, keeping share. But is the market on the box side coming down? And so can you talk a little bit about share and also the dynamics of box versus PXI?

Bill Sullivan

The box business is much greater than the PXI or the modular business, and it continues to be so, but we are building our modular offering because that provides advantages for certain customers. Our modular business is relatively small, and it continues to grow. We’ve stated that it’s roughly $100 million in the past.

Last quarter we saw approximately 50% growth and this quarter it was well into double digits, getting close to that same 50% number. So we are seeing traction. At first we brought out some of the infrastructure products, and now we’re coming out with core RF and wireless products to go forward.

As a matter of fact, the platform that we had for manufacturing is a modular platform that we just introduced, and the reviews on that product are very, very good. We’re very pleased with it.

Paul Knight - Janney Capital

Where do you think market share is? Any change? Is there a gain? Is there a loss? What’s your thought there?

Bill Sullivan

We’re definitely gaining share in the PXI market. There’s no doubt about it. I believe our growth is quicker at roughly 50% the last two quarters. But we will continue to work on that. That is a multiyear strategy that we’ll continue to drive over the next five plus years, until we’re number one.

Operator

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

Isaac Ro - Goldman Sachs

On the academic budgets, I want to ask a little bit about the comments there. It seemed like across the rest of the industry in life sciences there was decent fourth quarter budget flushes. So if you could put some color beyond the geographic comments you made there, that would be helpful.

Bill Sullivan

I’ll make a comment about China, which is more difficult, then turn it over to Fred to talk about the U.S. Again, a lot of these is who your customer base is, and exactly where you are in the process. Clearly, in China and there, our belief in January was a slowdown in terms of commitments in academic and research. And that was impacted by the Lunar New Year. So I don’t think that we’re going to get a really solid feel to exactly where our position will be in academic and research until Q2. And I’ll have Fred comment about the U.S., which is obviously a large market.

Fred Strohmeier

I think, you know, the NIH [unintelligible], if you look at the NIH [project], we’ve defended it for a large piece of the spending. You see that this is below the spending of 2012. And if you look to the pattern of things which are sold at the moment, there is some hesitation to spend the money on instrumentation as well as on services and consumables, and this is a consideration as we see it at the moment.

Bill Sullivan

And I’ll put my editorial on it again. Not to make an excuse, but every time Lunar New Year is in our January, or our Q1, we have a lot of anomalies that are difficult, and unfortunately it only shows up every three or four years. But if you go back over that period of time, it is always an interesting quarter to describe when we have this event.

Isaac Ro - Goldman Sachs

And then just as a follow up, if I could, on Dako, I don’t think I heard it, but if you could give the growth in the quarter there, that would be great. And just if you had any updated views regarding long term strategy here, on moving the [genomics] business in there along with diagnostics. And wondering if we might see some meaningful updates to the strategy for that combined asset base before the deal closes.

Bill Sullivan

Again, we combined the two organizations between the clinical and our pathology. We’re absolutely convinced our array CGH business as well as our target enrichment is going, and we had a very, very robust growth rate. But we did have a slow quarter versus our Q4. I’ll have Fred make a couple of comments about the pathology specifically, and any other color commentary regarding genomics.

Fred Strohmeier

The pathology business, as Bill said, was indeed a bit weak. We have pulled in a lot of orders in Q4 of last year. That was one effect. And quite honestly, if you look to the first quarter of fiscal year ’13, this also was impacted by an artifact so that at the moment, Q1 looks a bit low. I think we believe the demand for pathology is pretty robust, and in particular, as Bill mentioned, we see a lot, in particular in the clinical space, I think the micro arrays are outgrowing by far, at the moment, our competitors. Sure [fisher] is making inroads into the market, and by the way, also the microfluidics business is growing double digits, mid double digits, and this together gives a good footprint in the clinical space with the genomics products we are providing.

Operator

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

Ross Muken - ISI Group

I guess I’m still struggling a little bit in some of the deltas for the quarter, particularly as we look at aerospace and defense. We sort of came into the year, as you said, [unintelligible] flat, and now we’re down 5, but we just had a down 27, when I think last quarter we were down at about 11. So it was a pretty big deterioration. I’m just trying to get a sense for how something like that is so difficult to forecast. Or did it come in closer to where your forecast is and then the comps are going to drive it, etc.? I’m just not sure I totally understand. I know the Lunar New Year and some of the other factors, but I’m just trying to see what transpired maybe from a pacing perspective to where this was so difficult to sort out.

Bill Sullivan

Our forecast was to exceed the midrange of the guidance all the way up towards the end of the quarter. And right near the middle of January, the middle to second half of January, we received a very substantial number of requests to delay delivery until after Chinese New Year. That happened in China. We also saw some of that in other areas.

In aerospace/defense, the budget was signed in December, but at first what was happening, the end users didn’t know how much money they were going to get, because it wasn’t passed out to them. We actually saw nice acceleration in aerospace/defense right at the end of the quarter, but obviously that did not translate into revenue.

And don’t forget that Q1 ’13 was the largest quarter that we had in over eight quarters, where in Q4 of ’12, people were placing their last orders before sequestration and then we shipped that, about $195 million, in Q1 of ’13. So we had a very high compare on that standpoint.

So aerospace/defense, basically it was a very slow start to spending the money that picked up at the end of the quarter, and then in China, we saw some pushouts, and two orders alone accounted for $11 million worth of the delta.

Ross Muken - ISI Group

On the guide, the two things that are sort of perplexing to me, or I would say three, one, it seems like some of the issues we had were temporal and there are some assumptions of improvement, and yet sort of the guide, it doesn’t feel as if it reflects all of that. It seems as if you sort of took it down, at least on the revenue side, by more than the delta. So I’m a little bit confused there.

And then on the dropdown, again, to Tycho’s point, it seems like the decrementals are pretty substantial, just relative to the revenue change. Was there any thought process to maybe do more on the cost side? I know it’s always tough, but we’re sort of looking at an earnings picture here that’s similar to where we were four years ago.

So it’s been a pretty frustrating period, I know. Just trying to sense the temporal versus structural nature of some of this, because the guidance implies some of it’s temporal and some of it’s not. So I’m trying to sort out how you thought through that.

Bill Sullivan

From a management perspective, the thinking was very straightforward. Recovery of electronic measurement or [unintelligible] was in the second half of the year. That was the assumption of the guidance. We had a difficult Q1 to interpret. So we’re going into Q2 with quite frankly a fair amount of uncertainty because of the issue that Ron outlined very, very well.

So then the question that comes in is if we don’t change the guidance, then the second half recovery is just enormous, and I think that that would set wrong expectations. So we said if Q2 is what we think it’s going to be, then the second half snap back can’t make up the difference from the first half. So that’s logic number one, and hope we’re wrong, but that’s the logic path that we went in.

On the expense side, we’re in a big Catch 22. We have to win in modules. We have to win in communication. We’ve got to get these new products out. LDA has a whole string of products, and so to take draconian expense cuts, given this uncertainty that we have, also is I don’t think the right answer.

And so we made those two tradeoffs moving forward, and try to lay out to investors the best we can what we think will happen, given the problems that we had in Q1 in electronic measurement and the continued uncertainty going forward.

Ross Muken - ISI Group

And just one follow up. What about on the repo side? You’ve obviously got some flexibility. Stock will be down 5%. I think it’s over that now. I mean, I know there was a lot of hesitance to do that before the split. How much will the volatility and what we’re seeing here, if you do believe somewhat in the recovery thesis, how much does that sort of push you to consider maybe ramping that up a bit?

Bill Sullivan

We have been authorized by the board to maintain our share count at I believe it’s 335, and this quarter we’re actually at 338. So yes, we have the cash available, and yes, we have the authorization to continue to make stock repurchases.

Operator

Your next question comes from the line of Tim Evans from Wells Fargo Securities.

Tim Evans - Wells Fargo Securities

Let me just make sure that I understand, just to follow up on Ross’s question, the surprises in the quarter were really twofold, one being the Lunar New Year pushouts, and one being the weakness in the aerospace and defense market. Is that correct?

Bill Sullivan

Yes. In the short term, the Lunar New Year had a $15 million effect, and we were $19 million off the center of guidance and $9 million off the low end of the range, and the aerospace/defense picture, we believe, will be a slower recovery than we had anticipated before.

Tim Evans - Wells Fargo Securities

And I guess Ron, I think you mentioned that your orders were actually in line with expectations. I’m just trying to square those two comments in my mind.

Ron Nersesian

Yes, orders were fine, and that means that our Q2 guidance we could have met if we didn’t have the $15 million delays in the actual revenue recognition or customer acceptance. Longer term, for the second half, we just think that the aerospace/defense market, given its hole in Q1, and given where it’s coming from, is going to be a little bit slower.

So as Bill had mentioned, we have a real hockey stick, from roughly 7% decline in Q1, and we’re forecasting an 8% increase in growth in the second half, so we are expecting a significant upturn. And we’ve seen things like Europe. Europe has posted growth for seven months in a row. That feels very good. The semiconductor market overall feels very good. But there are other mix things that would cause us not to count on more than 8% growth in the second half.

Operator

Your next question comes from the line of Derik de Bruin from Bank of America Merrill Lynch.

Derik de Bruin - Bank of America Merrill Lynch

So just sort of looking at some of your more government exposed spending, correct me if I’m wrong, but I believe that your environmental forensics, core was down like 7% in Q3 ’13, it was flat Q4, up 7%. You know, is that environmental that’s rebounding there? Or if it is environmental, is it outside of the U.S. that’s doing that? I’m just curious, that also does have some government exposure to it.

Mike McMullen

As you know, we report the combined environmental forensic number externally. The story there actually, and it was a nice surprise, is the strength of the forensics business. And it was up fairly significantly in Q1. A lot of it is being driven by concerns about designer drugs and drugs abuse testing on a global basis, particularly we’re doing very well with various police and security authorities globally. So that’s been a real area of strength for us in the first quarter.

I would tell you that in the more developed countries, particularly in the United States, budgets remain quite sluggish. But I will tell you it’s a different picture than it was last year, which was we knew we were facing sequestration. This year we know the budgets have been restored in certain agencies such as the EPA. We haven’t yet seen those budgets being released. So I hope that gives you some clarity.

Derik de Bruin - Bank of America Merrill Lynch

And can you tell us how the OMIX platform did, in [backup]?

Fred Strohmeier

Yes, the OMIX platform is picking up as we speak. We have shipped a couple of dozen in the latest quarter. The feedback we are getting back from our customers remains positive. And we have put a couple of new assays during the quarter on the platform as well. We are just rolling the product out as the others come in.

Derik de Bruin - Bank of America Merrill Lynch

And just one final question, have you done any more work in terms of looking at the tax implications of the spend, and just how the tax rates are going to fall?

Bill Sullivan

Yes, we have. I apologize for not answering it directly, but we will share that in the Mach analyst day meeting. But we are very, very close to determining essentially what the tax rate will be for the new Agilent moving forward, and the range for our key sites in there. But please wait until March, and we will have that.

I think it’s important that I don’t give the number now, because the Form 10 will be published right before that, and then you will get a historical perspective of what the actual tax rates have been for what the two companies have been if they were independent. So I think it’s good to see the total answer in context moving forward. I continue to say that we are taking the opportunity to look at ways to ensure that we have sufficient cash in the U.S. Obviously Keysight has to have sufficient cash in the U.S. moving forward, and so there will be some tweaking of the overall tax rate.

Operator

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

Jon Groberg - Macquarie Capital

Bill, on the first quarter, on the LDA side, the area of life science and diagnostics, if we look at the gap between order and revenues, trying to go back in history a little bit, it looks a little bit out of the ordinary from a historical perspective. You mentioned you had [unintelligible] demand in the U.S. and China, but anything else that kind of ends up [unintelligible] in terms of the orders [unintelligible]?

Bill Sullivan

No, I think as Fred said, there’s clearly a lot of orders that were pulled into the last month of our Q4. The start off in November was terrible. We ended in January, I think, quite fine, I think a 7% growth rate, but we had a terrible start to the quarter. And I don’t know if we’ve trained all of our new employees about how the compensation system works at Agilent, for many, many decades, but nonetheless, we just had a terrible start to Q1.

January was fine, so basically some of the order shortfall in November got booked in October is basically what I’m saying, and we exited the quarter on the runway, and we think that we’re going to have solid growth as we move forward. But we did have a slow start to our Q1.

Mike McMullen

Hey, Bill, can I add some initial commentary from the chemical analysis side, which is, as you know, we have a large footprint of our businesses in Asia, so the story of Chinese New Year really did impact us, because we lost basically a good week or so worth of quarter end orders. And then also, back to the comments on U.S. government spending, I know earlier we were focusing on the life science implications of the U.S. government spending, but also it had a material impact on the results for CA in terms of the order rates coming in for the first quarter, albeit it’s a much different story than it was a year ago, because budgets have been restored, and we just need to wait for them to be released.

Jon Groberg - Macquarie Capital

And then, if I could just ask the question, maybe a little bit of a two-parter here, you talked about emerging markets like they’re one country. Obviously they’re all individual countries. Historically Agilent has had a nice, strong presence there. [unintelligible] has been a little bit less robust recently, so I guess one, can you give us some color about how you’re seeing the forecast in those markets for you for the rest of your ’14?

And then maybe tying that into strong EM business, maybe help me understand what gives you confidence that you will see that 8% growth in the second half. Historically, I know there’s always been a bit of a hockey stick, but talking to competitors now, everyone seems to say that they’re not seeing it yet, and I guess what are the major drivers this time around?

Bill Sullivan

I’ll make a couple of comments on the LDA side, and then turn it over to Ron on the Keysight side. Again, our non-GAAP in East Asia business grew 8%. Obviously China/Korea was very, very strong for us in the quarter. India continues to struggle. I think in the Americas, Brazil has its challenges moving forward. And so there are issues out there that we have to address, but quite frankly China just dominates the position for LDA. So how China goes, that’s how our emerging markets will go.

Ron Nersesian

As far as emerging markets, we sell in aerospace/defense to some of the emerging markets, in particular Russia, a little bit to India, and some to China. And we saw those markets were soft. As a matter of fact, if you add them up, like some other competitors have announced previously, our orders were off 16% in Q1 in the emerging markets. And again, that’s an overlay with aerospace/defense in certain areas. So that’s the environment that we’re seeing there, which tends to correlate with the guidance that we have going forward.

The things that make us excited is when we look at the second half, Europe continues to be strong, from the standpoint that it’s grown seven months in a row. And we had two major product platforms that we’ll start shipping in the second half. One is the wireless manufacturing platform, which is a modular based platform that’s getting excellent reviews, and the latest is the new one that we just announced a couple of weeks ago, which is a new wireless R&D platform.

And just to give you an idea, this platform is the latest and greatest. It’s up there, and customers have been giving us reviews saying it’s the best platform that exists on the market. It handles LTE advanced and category six data rates up to 300 megabits. It does carrier aggregations, all the latest things. And it has integrated fading, which is typically something that someone would have to buy a [unintelligible] product and hook it up with their wireless product in order to make the solution happen.

So when we take a look at the strength of the products, the feedback that we’ve had in these areas, how Europe has turned around, and also how things are starting to pick up in some other areas, that gives us the confidence for the second half.

Operator

[Operator instructions.] And your next question comes from the line of Patrick Newton with Stifel Nicolaus.

Patrick Newton - Stifel Nicolaus

Ron, one clarification. You sized your PSI business at roughly $100 million. I’m curious if that’s a trailing 12-month basis, or is that from annualizing current quarterly results?

Ron Nersesian

That’s from a trailing 12-month, and that’s our PSI/AXIe modular business. Total modular business.

Patrick Newton - Stifel Nicolaus

And I guess I was curious, when you talked about the drivers for the [unintelligible] in the second half, you didn’t mention necessarily the Chinese opportunity, and you didn’t really mention wireless test directly. I guess you did talk about your two major product lines. So I’m curious, can you update us on timing or opportunity with China Mobile? I think you previously sized that at, I think, a $30 million annual opportunity. And can you talk about wireless test and expectations there?

Ron Nersesian

There’s no doubt with our new platform that’s coming out, we are gaining momentum. If you look at two areas where we probably had the biggest product holes on a competitive basis, it was in the wireless manufacturing and wireless R&D platforms. And we have really come a very long way in those areas within the past year.

With regard to China Mobile, for the TDD/LTE spectrum, it was awarded to all three players ahead of schedule. Commercial licenses have been issued, and China Mobile plans to put in place 500,000 LTE base stations in 340 Chinese cities. And we’re very much engaged in that. Obviously Ericsson is number one in share, Huawei two, NSM three, and Alcatel Lucent four, and we are very strong in the base station area, and will continue to try to win that business.

Patrick Newton - Stifel Nicolaus

And I guess going back to the wireless test side, you had a competitor that said that the market compressed from about a $1.3 billion opportunity to $1 billion since 2013. Do you agree with that assessment? And two, do you expect that the competition is going to continue to compress that market in 2014? Or should that industry come back to growth?

Ron Nersesian

We see growth in communications for us. We have forecasted a 2% growth for the year. The market’s probably flat. There are two things that are going on there. We’re obviously seeing the unit volume increases from 1.8 billion phones or the 1 billion smartphones that are being produced today.

But you also do see some price erosion that goes on as we’ve seen more consolidation in the marketplace, and you’ve seen a couple of the smartphone manufacturers actually put a little bit more pressure on the market.

The good thing about this market is these standards continue to evolve. They are very highly complex technical challenges, and accordingly, we seem to offset that with our business in R&D or by having leading edge technology. But looking at all that, we still see that 2% growth when you factor in the unit growth and the pricing situation.

Patrick Newton - Stifel Nicolaus

And last one, I guess for Bill, there’s some components and subsystem suppliers in your academic and government food chain that are seeing an uptick in demand, especially in North America, given the Ryan Murray budget deal. And although you reported this area as being a soft area for you in the quarter, I’m curious if you’ve seen any impact at all from the budget deal.

Bill Sullivan

I’m not sure that I know. No, there’s nothing for us. Again, we’ve been a late entry into that market since our program that we made in triple quad and [unintelligible], and obviously in our genomics area. And so I’m not sure that our own issues are somewhat unique to what our investment strategy is and exactly who those customers are. So we’re not of knowledge that any particular impact good or bad, versus the [unintelligible] that you had asked about.

Operator

And your next question comes from the line of Doug Schenkel with Cowen & Company.

Doug Schenkel - Cowen & Company

My first question is on the decrementals again. I mean, the decrementals implied in the EMG guidance are, to be fair, pretty surprising. If we go back 12 to 18 months, you said you couldn’t cut spending any more in [EMC] without cutting into bone. Then last year you found ways to cut a lot more than people expected. Now it doesn’t seem like you’re getting to the leverage one would have expected to see if the cuts you had made in the second half of last year were sustainable. In hindsight, did you guys cut too far last year? And has something changed that suggest that you now need to invest more in what appears to be a more challenging environment than you had anticipated?

Bill Sullivan

There’s no doubt we cut very deeply, and I would say that we were on edge. There are a couple of product areas where we really needed to invest and win. It’s as simple as that. The wireless one box testers, we talked about those key products. And again, we’re in this for the long haul. We don’t want to be short sighted. If we didn’t anticipate an upturn that would be coming within quarters, we would potentially do something different. But given how important it is for us to be number one, and given what we see coming, we believe that this is in the best interest of the shareholders and they’ll be happy for it over time.

Doug Schenkel - Cowen & Company

The last few quarters you talked about picking up share in areas like LC and to an extent mass-spec. And looking at your results, it’s not clear that that continued into Q1, especially when you look at your growth and how it compares to your peers. And related to this, it doesn’t seem like your pharma growth was nearly as robust as some of your peers. What was different this quarter for you?

Bill Sullivan

Again, be very careful comparing quarter to quarter, particularly given our quarter is off all of our competitors. We had a very strong end of the year. Our competitors had a very strong close at their end of the year. You really have to look at the rolling four quarters when you look at Agilent moving forward.

If you in fact look at the organic growth rate, the last four, we’re basically at the overall market. I would argue the second half of the last two quarters we have been slightly above that. At the beginning of the year we were slightly below that moving forward.

But again, I’d be very cautious of making those comparisons, because I’m sure that many people ask our competitors, how come Agilent had such a great four? And again, I think you’ve got to really normalize it on a calendar day to really get a true view of what the true organic growth rate is.

Bottom line is, last four quarters we were basically growing at the overall market, which we believe is about 5% organic growth rate.

Didier Hirsch

And even this quarter, we’ve grown 6.4% on the currency adjusted. Taking into account the fact that we had China New Year, which our competitors don’t, and last year it wasn’t there, it was in February.

Doug Schenkel - Cowen & Company

All good points, but to be fair, you guys were the ones who proactively said you were picking up share in some of these areas. Do you still believe you’re picking up share?

Bill Sullivan

I am very cautious on market share. All the comment was is that our growth in the fiscal year was higher at that point in time than the competition. Then they ended their fiscal year and you saw that little bit of shift moving forward. We are very, very cautious on doing it. The competition is very, very good. They have their up and down quarters, we have our up and down quarters, specifically in areas that we have done well, such as the LC, other areas that we have been below the market. And so in aggregate, right now, if you look at where everyone is today, plus our additional month, we’re roughly, non currency adjusted, at a 5% organic growth rate, which is the weighted average of the market.

Doug Schenkel - Cowen & Company

And last question, and I think it’s an important one, even though right now it’s not a huge part of your business, as we look ahead, and we think about the company post-split, one of the things that’s got people excited about the story is the prospects of life sciences being an above-market grower with the potential to really expand margins at your growth levels. But one important component of that is really anatomical pathology growing strongly, and you guys did talk about not having a great quarter there. And again, one quarter doesn’t make a trend, but can you tell us, were autostainer placements about where you expected them to be, or was that a source of weakness in the quarter relative to plan?

Bill Sullivan

No, as Fred said, our placement is going exactly as we want it to do. I’ve also been very clear that we are taking a very deliberate path to install, to ensure that the equipment works, that there aren’t issues moving forward, that we have the right products that are validated on it, that we have new releases. And again, we’ve said this for many years, this is going to be a slow, methodical process. We did not want to get ourselves in a situation where we overextend ourselves, we get placements in place that aren’t performing to what we believe the instrument can perform. So we are systematically engaging, as Fred said, and installing a dozen systems every quarter.

Operator

And your next question comes from the line of Dan Arias from UBS.

Dan Arias - UBS

Maybe just two on the cost within the P&L. In the past, you guys have talked a little bit about your ability to, within your model, take down fixed costs in addition to some of the variable portions if you do need to. How much of a lever are you actually finding that to be at this point? And I guess the follow up, what portion of the cost structure is actually variable at this point?

Bill Sullivan

I’m going to go back to the broad strategic decision. We, based on our guidance, given the uncertainty, are not going to pull the trigger right this moment to dramatically reduce our variable spending. We could do that, Didier talked about it. We did a year ago and took $30 million out. All of the triggers that we have in place still exist. There is too much uncertainty in the quarter to execute that.

The issue clearly is in Keysight. [Ron’s story], soon to be a large shareholder, is all about growth, and we have to continue to execute on the programs that we have had. And obviously Ron and the team, as they move forward the new board - in fact, if you don’t have the [unintelligible], you can pull those triggers. So we can do that tomorrow. It is quite easy to pull the triggers. All the variable components that we have in place are exactly the way they were in the past.

But just given the outlook it is, I’m in 100% support of Ron and his decision to continue to execute the plan and be realistic on what the second half recovery can be, and not just sit here today at the beginning of the year and hope for somehow you’re going to get a huge growth in the second half of the year. And I just don’t want to set unrealistic expectations.

Operator

And your final question comes from the line of Bryan Kipp of Janney Capital Markets.

Bryan Kipp - Janney Capital Markets

Any split costs you guys have in your assumptions for guidance for the rest of the year? Or is it probably the same thing, the 25 that you saw this quarter and the pull through?

Bill Sullivan

No, we’ll give more detail in the March meeting. But in terms of the split cost, what we will say is that the one-time separation costs will be higher than what we said before. We’re doing two things. One is we’re accelerating and expanding the branding of Keysight, and I think that’s clearly a worthwhile investment. And we are making greater progress on the separation than we had alluded to. The outcome of that will be that the synergy costs on the Keysight side are going to be minimal, and the synergies on the Agilent side are going to be higher, just because of the great job the team has done in separating.

As a result of that, for example, the service agreements that Agilent was soon to provide to Keysight, there are not going to be that many service sites. Again, we are making superb progress in setting up the IT systems, separating the real estate, setting up all the systems to ensure that Keysight can be a very credible, established company from the get go. But other than the shift back and forth, there isn’t any substantive material change than what we’ve talked about, in my opinion.

Operator

And we have reached our allotted time for questions. Alicia Rodriguez, back over to you for closing remarks.

Alicia Rodriguez

Thank you, operator, and just wanted to say thank you, everybody for joining us on the call today. If you have any questions, please give us a call in IR. And I’d like to wish you a good day.

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