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Agilent Lowers FYQ1 Guidance 7-10 Percent On Fallen Orders, ‘Deteriorating’ Economy

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Agilent Technologies this week lowered its guidance 10 percent for the first quarter of its fiscal 2009 after reporting a drop in orders, but blamed the ongoing “deteriorating” economy and said during an analyst meeting that “normal” financial results may not return for another 18 to 24 months.
 
In a filing with the US Securities and Exchange Commission, the company said that “deteriorating economic conditions” have forced it to lower its first-quarter revenue guidance to a range of between $1.25 billion and $1.30 billion from between $1.34 billion and $1.39 billion.
 
The change was due largely to a particularly pessimistic outlook in Agilent’s Electronic Measurement division — which accounts for around 58 percent of the company’s annual revenue — and in particular its semiconductor and board-testing business.
 
But as company officials continued to portray the firm’s Bio-Analytical Measurement division — especially the life-sciences segment — as a growth engine, they said that a true picture of that business would remain opaque until early- or mid-2009 because the BAM business lags behind the overall economy.
 
“We’re pretty sure that that [market] will continue to soften and that’s what we’re planning on [but we’re] hoping to be proven wrong,” CFO Adrian Dillon said during the company’s annual Analyst Meeting in New York this week.
 
Most of Agilent’s businesses will sequentially decline until they bottom out during its fiscal third and fourth quarters, he added. And it likely will be another 18 months to two years before company-wide earnings results return to “normal” as represented by results achieved during the past two years, company officials said.
 
The preliminary outlook for FY 2009, which began Nov. 1, is for BAM revenues to remain flat year over year, while EM is expected to fall 15 percent driven by a 25 percent decline in its semiconductor and board-testing units. Overall, Agilent expects FY 2009 sales to slip 10 percent.
 
The guidance downgrade was based on orders received in November, which Agilent CEO Bill Sullivan described as “quite weak” to the audience of Wall Street analysts this week.
 
Softness was seen especially in its EM division in which orders declined across the board, and geographically by as much as 45 percent in Japan. Its BAM segment, which he said was off to a “reasonable start,” also saw softness, though mostly in Europe.
 
Since the meltdown on Wall Street began to accelerate in late summer, Agilent officials chose to take a cautious approach. Last month, during a conference call accompanying the release of its fiscal 2008 fourth-quarter earnings results, Sullivan said that the company is assuming “no geographies or markets will be entirely immune from [the] impact” of the economic downturn.
 

“January, February is [when] we’ll really see what is going to happen.”

To be sure, as a hybrid electronics, life-sciences, and chemical-analysis firm, Agilent is probably more exposed than pure-play life-science companies to volatility in the broader markets.
 
But this week, Sullivan reiterated the importance of its life-science business, saying that it is “the biggest [growth] opportunity” for the company. In particular, Agilent is continuing to focus on the academic and government research market, which makes up about half of the total $17 billion life-science market, according to the company’s estimates,  but only about 4 to 5 percent of the Agilent’s total revenues. 
 
“We’ve always had a strong position [among] pharmaceutical, biotech, contract-research organizations, but we are making real progress into selling into [the] academic and research” market, Sullivan said. “We have almost doubled our presence there with a long way to go.”
 
Life sciences, he added, is “about refreshing the core and adding new capability, new product platforms, to be able to extend our ability to … provide leading-edge measurement capabilities into the analytical space.”
 
Moving ahead, the company will continue leveraging the technologies developed by its EM division to life-science applications, including its mass-spec business, Sullivan said.
 
“I firmly believe our electronics capability … has allowed us to enter this market … to be a real player in terms of triple-quad, time-of-flight, and particularly time-of-flight instrumentation, the very high end of the mass spec market,” he said.
 
While optimistic that BAM will be the company’s “growth engine,” company officials are choosing to take a conservative stand on that segment for the future. Organic growth among Agilent’s competitors is about 5 percent, “and you are seeing a slowing in the analytical market,” Sullivan said. “There is no lack of issues in big pharma around the world, and even though our internal projections would assume that we would, in fact, see some growth in the [Bio-Analytical] market moving into 2009, we just believe that it is very prudent to model zero growth.” 
 
A clearer picture of the division will not come until after the start of the New Year, he added, after commercial, government, and academic customers will have used their end-of-the-year budgets on a spending spree, which can create an illusion of a healthy future.
 
“January, February is [when] we’ll really see what is going to happen,” Sullivan said.
 
’Gut-Wrenching’
 
If Agilent is well-prepared to weather the current turmoil, it can look back to 2001, when the company had to survive a crash in the technology sector that crippled many tech firms, Agilent officials said this week.
 
While that storm was brewing, Agilent had been growing at about 50 percent and had hired 15,000 workers, Sullivan said. However, when it hit, the company was forced to lay off half of its North American workforce and 40 percent of its European staff. The company also exited several businesses. 
 
“We went through a gut-wrenching experience inside of Agilent,” Sullivan said. “That lesson was not lost” on the company, he said, which in the years since has implemented changes that now have positioned it to better face the current turmoil.
 
For example, half of Agilent’s manufacturing is outsourced today, compared to 25 percent seven years ago. In addition, much of the company’s internal manufacturing has been moved to low-cost countries such as China, Malaysia, and Singapore.
 
Agilent has also lowered its fixed costs by changing to a variable-cost salary structure, which ties employee paychecks “directly to the success” of the company, from a fixed-salary structure. In FY 2008, the company had $175 million in Agilent Variable Pay, which is calibrated to the company’s return on invested capital, compared to zero in 2001.
 
“We will automatically adjust our pay based on the business performance of the company, and that is now built [into] the system,” Sullivan said.
 
The company has also exited, either completely or in large part, volatile markets such as semiconductor and semiconductor testing.
 
During the current crisis, Agilent has also taken steps to reduce discretionary spending; eliminated merit pay raises; reduced its AVP structure; and instituted a hiring freeze. In total, the moves are expected to save the company $245 million. Another $65 million in savings are anticipated with the elimination of temporary-worker positions and “targeted restructuring.”
 
Depending on market conditions, it also is prepared to implement a 10-percent pay reduction, which could save $100 million a year, and further cut into its AVP pay structure, which could cut another $35 million to $140 million annually, Agilent said.
 
Also, if total revenues decline more than 15 percent, Agilent will cut 10 percent of its employees as part of a “focused workforce reduction,” which would shave $150 million off annual costs, the company said.