Agilent Technologies, Inc.

Good afternoon, and welcome to the Agilent Technologies third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you, and now I'd like to introduce you to the host for today's conference, Ankur Dhingra, Vice President of Investor Relations. Sir, please go ahead.

Thank you, Mike, and welcome everyone to Agilent's third quarter conference call for fiscal year 2019. With me are Mike McMullen, Agilent's President and CEO, and Bob McMahan, Agilent's Senior Vice President and CFO. Joining in the Q&A after Bob's comments will be Jacob Tyson, President of Agilent's Life Science and Applied Markets Group, Sam Raha, President of Agilent's Diagnostics and Genomics Group, and Mark Doak, President of Agilent's CrossLab Group. You can find the press release, investor presentation, and information to supplement today's discussion on our website at investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year over year. References to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of July 31st. We will also 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. And now, I would like to turn the call over to Mike.

Thanks, Ankur, and thanks, everyone, for joining our call today. Our Q3 results exceeded our expectations. The adjunct team delivered total revenues of $1.27 billion, up 6% on a core basis. Our EPS of 76 cents is up 13%. Both our top line revenue and EPS are above the high end of our guidance range. This marks our 18th consecutive quarter of adjusted operating margin expansion. In July, we also announced the pending acquisition of biotech. which would be our largest acquisition since the 2015 launch of the new Agilent. We continue to invest for growth even amid market uncertainty. At the same time, our Agile Agilent business system continues to drive operational improvements. Our excellent overall company growth is being driven by two factors. First, strength in the global pharma market in both small molecule and biopharma. Secondly, geographic strength in the U.S. across most end-market segments. China growth was generally in line with expectations. Business unit performance is led by double-digit growth in our Agilent Cross Lab and Diagnostic Genomics group. Let's take a closer look at the performance of all three of our business groups. I will start with ACG, our Agilent Cross Lab group. The ACG business continues its trajectory of consistently strong results with 11% core growth. This growth was broad-based across all market segments and regions. Our service business grew at a double-digit rate as we continue to see higher demand for our expanding portfolio, both from current and new customers. We see a continued secular trend of customers seeking to drive increased productivity and to outsource non-core services in the lab. Our services offering puts us in a leadership position to benefit from that trend. Our consumables business also grew double-digit. We continue to introduce highly differentiated consumables that address important customer challenges and significantly improve the user experience, especially in high-growth markets like biopharma. I'm very pleased with the continuing positive impact on total company results from the absence cross-lab strategy. Our consistent results speak to the strong execution from the Agilent team and the value we bring to our customers. We're meeting the ever-increasing demand from our customers, and we see the attach rates to our installed base of instruments consistently improving. Now, turning to DGG, our diagnostic and genomics crew business. DGG's growth momentum continues with strong 13% core growth. The growth is broad-based across pathology, genomics, and our NASD businesses. Let me share a few additional comments on our NASD business. NASD turned in a very strong third quarter as we continue to see increasing demand from our customers' clinical trials. As a reminder, in June, we opened our second production facility located in Frederick, Colorado. We remain on track to start commercial shipments this quarter. We also announced that we purchased our previously leased site in Boulder, Colorado. These two facilities enable Aslan to meet the growing demand for development of RNA-based therapeutics and continue to be a partner of choice to both pharmaceutical and biotech companies. Now, moving on to our LSAG, our Life Sciences and Applied Markets Group business. LSAG's revenue is flat year-over-year on a core basis and in line with our expectations. Strength in the pharma, environmental, and forensics markets was offset by chemical and energy declining against a very tough 12% compare and expected weakness in the China food market. As you know, in Q2, we discussed three areas that impacted LSAG's growth rates. Let me give you an update. First, starting with the 4 plus 7 initiative in China, we saw a sequential improvement in demand from generics manufacturers. This is driven by business coming from the winners of the first 4 plus 7 pilot, resulting in growth in our instruments business. We have deep relationships and history with these customers. While the program is expected to expand over the rest of the calendar year, we see incremental regulatory clarity ultimately driving increased production volumes in a favorable long-term investment environment. Second, the China food market conditions remain the same as last quarter and in line with our expectations with revenues flat to Q2. The business from government-owned labs remains muted while commercial testing labs activity is increasing. We are expecting similar overall market conditions this coming quarter as well. Finally, the global small molecule pharma business outside of China saw improvement in demand relative to Q2. We saw budgets free up and LC replacements taking place in some of our large accounts, as well as the addition of new customers. While macroeconomic and political conditions are creating market uncertainty for capital investments, I am quite confident in our ability to take market share in whatever market environment we encounter. We have an industry-leading portfolio and are not sitting still. We continue to invest in new offerings and markets. One of these new market investments is the pending acquisition of biotech. As I mentioned earlier, this quarter we announced our intent to acquire biotech, a global leader in design, manufacture, and distribution of innovative cell analysis instrumentation. I'm very excited by this significant step forward in strengthening our leadership position in the fast-growing cell analysis space. Our strategic focus in this area began with the purchase of Seahorse Bioscience in 2015. and was followed by the acquisitions of Luxo Biosciences and Aseo Biosciences in 2018. By combining biotech's offering with Agilent's, we will create a business with revenues of greater than $250 million per year, up from zero four years ago. This business is growing double digits today. Looking ahead, we will now be able to deliver a breadth of differentiated workflows, enabling customers to obtain deeper, more reliable insights across a variety of cell analysis applications. This is yet another example of how we're investing in new, high-growth markets where we can leverage core Agilent capabilities and our one Agilent culture. The culture and portfolio fit with biotech are extremely well aligned. We share the same core values and have very similar cultures with a genuine focus on our customers and teams. I look forward to welcoming the biotech team into the Agilent family. We expect the acquisition to close later this fiscal quarter. We also continue to bring new and innovative offerings to the market across all of our businesses. These new offerings are consistently drawing very strong interest from both new and existing customers. For example, earlier this year, we launched major updates to our gas chromatography, spectroscopy, and genomics portfolio. In addition, in Q3, we had an excellent showing at the ASMS conference, highlighted by the launch of the new Agilent Infinity Lab LC-MSD IQ system. This new system incorporates designed-in smart features, software, and hardware developed specifically for chemists and chromatographers. Our new LC-MSD IQ system is a single-quad mass spec built on the revolutionary Altivo LC triple-quad core technology platform. We also launched a brand-new Agilent 6546 LC-QTOF system that provides analysts the ability to simultaneously acquire high-resonance data across an unprecedented dynamic range. In addition, during the quarter, we introduced a new Agilent 6495C triple-quad LC-MS system that provides industry-leading precision in complex matrices. And finally, we introduced a new Agilent Bravo sample prep system for a metabolomic analysis of human plasma samples This new offering further strengthens our leading position in metabolomics. We also brought to market the first outcome of our joint development work with the newly combined Agilent and ACEA teams. At the CITO 2019 conference, we introduced the Novacite Advanteon flow cytometer. This new offering addresses today's high-end and increasingly sophisticated multicolor flow cytometry assays. It provides unsurpassed sensitivity, resolution, detection speed, and flexibility of fluorescent channels. In addition, the number of indications from our PD-L1 diagnostic assay continue to expand. In Q3, we received FDA approval for two new indications. Our PD-L1 diagnostic may now be used as an aid in identifying patients for treatment with K-treatment in a total of six cancer types. While making all these investments and launching new products, we continued our trajectory of margin expansion by 90 basis points versus last year. Our Agile AdWords system of continuous process improvement and disciplined cost management keeps the team focused on finding and executing on new opportunities. A few closing comments on our Q3 results and company transformation that has been underway for several years. Looking ahead, we continue to see uncertainty in a challenging market environment in some end markets for capital instrument purchases. This quarter's results again demonstrate Agilent's ongoing transformation towards higher growth markets and an increasingly resilient business model with a higher mix of recurring revenue streams. Given our Q3 results and outlook, we're raising our full year guidance for earnings as well as revenue growth at the midpoint of guidance. Bob will describe this in more detail. Before I turn it over to Bob, I'd like to leave you with a few, a couple of thoughts here. At the close of our Q2 call, I commented that great companies do not just react to market conditions, they see market opportunity. At Agilent, we will continue to invest for growth and take market share in whatever market conditions we encounter. We're continuing to drive productivity and we're doubling down our efforts to be a more agile company. We will continue to leverage our strong balance sheet to invest in the business and return capital to our shareholders. I'm quite confident that our company has never been stronger and that we're well positioned to drive continued growth and earnings expansion in an increasingly uncertain global economy. Thank you for being on the call, and I look forward to answering your questions.