Agilent Technologies Earnings Call Insights: Life Sciences, EMG

On Monday, Agilent Technologies Inc (NYSE:A) reported its second quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

Life Sciences

Jon Groberg – Macquarie Securities: Just two for me and congratulations on a good quarter and seems like it’s been a tough operating environment as we listen to others. Have you think about the revenue guidance just maybe get a little bit more clarity there because I think it actually came in at a high end of the guidance. Sounds like your book to bill was pretty good if you’re better about the comps, but your revenue guidance overall – if you take the midpoint, you said maybe – it didn’t really moved that much, so maybe can you just talk about what you’re seeing from an end market perspective and kind of what’s built into that outlook?

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

Jon Groberg – Macquarie Securities: Okay, so just conservatism given everything that you see in the world if there’s anything right now that’s going on with the business?

William P. Sullivan – President and CEO: I think in terms of the business we have two areas that we highlighted, Europe is struggling particularly on the Electronic Measurement side in academic and research on the Life Science side were down. That was more than offset by the wireless manufacturing, that one of course will continue to be the most volatile in that, but right now we continue to play a strong hand on the wireless manufacturing and again on a adjusted revenue going forward the rest of our core businesses in terms of pharma, food, petrochemical and general purpose, test measurement look reasonably strong.

Jon Groberg – Macquarie Securities: Then if I just follow-up on the Life Science, you alluded to, I know you said government academic was weak, you just highlighted pharma was fairly stable it sounds like – but the one thing in that business if you look at the margins, kind of the incremental margins, it looked like things improved a little bit in the first quarter of ’12 relative to the trend, kind of took a step back a little bit again in the second quarter, can you just kind of talk about, I think you said comps got easier, so I don’t know if that’s if you’re thinking more about the pharma side versus the government academics, maybe how that plays out and what you do expect from the margin side of that business in incremental margins on the Life Science side?

William P. Sullivan – President and CEO: Jon, I am going to have Nick respond to your question regarding the outlook and the margins.

Nick Roelofs – SVP, Agilent and President, Life Sciences Group: Yeah, so Jon, I’ll kind of walk you from the top. If we had softness in the orders in academic as we pointed to frankly that order softness was sitting heavily in the research products division and also in the genomics division. Genomics took like a pause. Research products, we’re now in the back end of the stimulus money. So we had a tough compare last year. Those orders in research products that we took last year are now shipping and frankly the operating margin on some of those orders weren’t as good as we had hoped as you know that business is in a repair mode, so that’s where the gross margin movement is, the mix equation for the quarter.

Didier Hirsch – SVP and CFO: But we do forecast in our guidance an improvement in operating margins as per overall commitment for the year with sound incremental for the whole year.

EMG

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

Didier Hirsch – SVP and CFO: EMG had a very sound incremental this quarter of 34% and with a pretty high I would say ROIC of 48%. So we’re very pleased with EMG’s results. This being said, there is as we have always said gross margins are higher in R&D test than they are in manufacturing test in the communication space and there was a pretty significant content of manufacturing wireless, manufacturing test business this quarter, which we think, will be sustainable for the next quarter, but we are – again for the whole year, EMG’s operating margin incrementals are very, very much in line with our model.

Nandita Koshal – Barclays Capital: So, the gross margin was really just a mix effect, and you expect that to swing back to a more normal level?

Didier Hirsch – SVP and CFO: The gross margin exactly it’s – there is the mix impact, which will stay with us at least for the next quarter and potentially it gets a little better in Q4.

Nandita Koshal – Barclays Capital: Did the overall incremental guidance for the full year soften a little bit from sort of 35 to 33, or did I get that – did I mishear that?

Didier Hirsch – SVP and CFO: Well, there is always a little bit of noise here or there as for example, if there is a slightly currency changes, they impact the top line, but they don’t impact the bottom line, therefore they changed the incremental, so it’s a little bit kind of mechanical thing. But overall we are very much in line with our commitment at this kind of revenue growth, in fact we are better than our commitment in terms of (operating) margin, thanks in big part to our strict control of operating expenses.

Nandita Koshal – Barclays Capital: Then just to wrap up, I wanted to ask Bill, about the quality of visibility in the business just broadly, but in EMG specifically, Bill you had said the signal to noise was rather weak last quarter, maybe if you could us update us on some of those species that you had called out as being weak in Q1, the base stations, RF components, some of the supply chain color?

William P. Sullivan – President and CEO: I will just a make a few components and then it turn it over to Guy, but as we said last quarter, there was a lot of softness in the base station purchasing as well as the RF components and again at high level has not gone a lot better. Wireless manufacturing tests for cell phones has gotten a lot better, but Guy can give more details.

Guy Sene – SVP, Agilent and President, Electronic Measurement Group: Yes, Bill. I will just confirm what you said. We’ve seen clearly uptick in wireless manufacturing tests, but what we had said in Q1 is the overall business for base station, and the added component of manufacturers that supply the base station business have not changed and we overlooked, but we’ll see this over the next couple of quarters being the case. In the other businesses, clearly, which had very balanced in fact results across the different market segment, as we see both aerospace, defense are stronger than what we expected and our overall ICS segment also growing 5%, so we have very stable and balanced outlook for EMG.